By William Brown

China’s trade with North Korea contracted sharply in September from relatively high August levels, and continues an erratic if unmistakable decline since tighter UN sanctions were agreed upon a year ago, at least according to China’s customs bureau. Since the strongest sanctions were set to begin only on September 5th, October data, due out in about three weeks, is needed to confirm if these will begin to inflict real damage on North Korea’s economy.

Trouble could be caused on several fronts, including rising inflation caused by commodity shortages, government budget issues stemming from a loss of foreign exchange earnings, and labor issues as state sector wages remain far below the growing private sector. One might also expect panic selling of North Korean won at some point. But none of this has happened yet and many more months of suppressed trade may be needed to put real pressure on Kim’s decision-making.

The August spike in Chinese imports was said by Chinese trade officials, and by traders, to have been inflated by a Customs ruling that allowed processing of large amounts of North Korean anthracite that had been unloaded on Chinese docks earlier in the year but had not been allowed to clear customs. By letting the coal in, the officials say they have cleared the books and now intend to enforce a total embargo on coal imports set to begin in the first week of September. This has caused some to doubt Chinese sincerity but we need to be mindful that all this data is provided by China’s government so there are easier ways for it to manipulate facts, if that is its intention.

In September:

Chinese imports, at $137 million, fell in half from the August spike, and, more importantly, were down 40 percent from year-earlier figures. Coal led the decline but almost all categories fell sharply. (see table below)

Chinese exports, which encounter mild sanctions but are constrained by North Korea’s foreign exchange earnings—the country is virtually without credit—were down 6.7 percent to $266 million from year-earlier levels and from $316 million in August. The data, however, is not seasonally adjusted so month-to-month changes should be used with caution.

With Chinese exports running twice imports, North Korea’s deficit on goods trade is presumably financed by net North Korean service sector and transfer payment earnings, or spending foreign exchange reserves.

This data does not include an assumed 50,000 tons of crude oil a month, worth about $20 million, provided as Chinese aid to North Korea. There is no indication of other foreign aid from China or anywhere else, a big change from earlier decades when Pyongyang depended on handouts. Ending of this Chinese aid, which directly supports the state sector, would significantly increase pressure on the regime.

The Chinese government data, not unexpectedly, shows China to be generally in compliance with UN sanctions as these have been ratcheted up over the last several years. Imports of iron and non-ferrous metals ores, and fish products, fell to near zero in September, and exports of petroleum products have remained low since last spring, well under the sanction limits. The exception has been textiles where trade has been strong both ways, coming up to anticipated tight sanctions on Chinese imports slated to have begun in early September.

Surprisingly, the impact of sanctions, and the drop in North Korean foreign exchange earnings, has not yet shown up in North Korea’s relatively new informal foreign exchange markets. The won has held steady despite what one would think is strong selling pressure in the domestic markets, and, other than petroleum fuel prices which have remained very high since early summer, inflation appears to remain under control. This could mean the regime is finding new ways of bringing in foreign exchange, that the data are missing large amounts of North Korean sales in China and elsewhere, or that the central bank is squeezing money supply to prevent the won’s devaluation. The latter seems likely but the consequences for the regime could be severe since it may have trouble meeting wage demands of its huge workforce. Defector reporting suggests as much, as state workers continue to earn negligible wages—only a few dollars a month using market prices—compared to likely growing private sector incomes, and the rations which they depend upon remain under-filled. The reporting indicates that the government is involved in ever more stringent campaigns to collect foreign exchange that circulates amazingly freely throughout the economy.

Helpful to the regime, there is no indication in the trade or in separate price data of a severe food shortage, as predicted by the UN Food and Agriculture Organization last summer. Cereal imports from China fell to near zero in September, although milled wheat flour, possibly UN food aid deliveries purchased in China, increased. Presumably, the regime would purchase grain if it felt the situation was dire. Rice prices rose before the October harvest but not more than normal, according to DailyNK reporting. Corn prices, more affected by the drought, have jumped but remain lower than several years ago.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. He is retired from the federal government. The views expressed here are the author’s alone.

Photos from Samuel Quinn Slack’s photostream on flickr Creative Commons.