North Korea’s trade with China : aggregate and firm-level analysis

다국어 초록 (Multilingual Abstract)

This dissertation uses firm-level as well as aggregate data to investigate the economic relationships between North Korea and China. More specifically, it analyzes the effects of North Korea-China trade on the economic growth of North Korea. It further discusses the impacts of sanctions by South Korea and Japan on North Korea-China trade. Finally it estimates the determinants of the performance of firms that are trading with North Korea in China
Chapter 2 uses cointegration tests and Vector Error Correction Model (VECM) to examine causality between Sino-North Korean trade and economic growth of North Korea from 1970 to 2012. To carry out empirical analysis, VECM is constructed, which is comprised of four variables, GDP, exports, imports, and investment. Investment is used as the key explanatory variable of economic growth, and imported capital as a proxy of investment. The cointegration equation suggests that the mechanism of North Korea’s economic growth is basically similar with that of low income, market-oriented countries, in the sense that trade and foreign capital inflows do matter for its growth. The estimation of the VECM shows that, in the long-run, exports, imports, and investments Granger-cause income through error correction mechanism, but not vice versa. With respect to short-term causality, however, the variables have little causal relations with each other except for causality flows from imports to exports. This shows that traditional barter-type settlement is still prevalent in Sino-North Korean trade.
Chapter 3 addresses the question whether North Korea–China trade dilutes the effects of the unilateral sanctions imposed by South Korea and Japan, and if so, to what extent and in what way. It finds structural adjustment of North Korea’s export pattern in size and trade type for the purpose of diluting the effectiveness of the unilateral sanctions, imposed by South Korea in particular. It also finds that South Korea’s economic sanctions significantly boost North Korea’s exports to China, and the export increase has been large enough to cover the loss from South Korea’s sanctions. In particular, North Korea has increased both exports to the Chinese domestic market (through general trade) and exports transferred in China (through bonded trade). These findings show that North Korea has mitigated the economic damage of sanctions by employing a broad range of techniques for trade diversion. The changes would take place because incentives of both North Korean regime and foreign firms meet well particularly after South Korean sanctions.
Finally, Chapter 4 identifies the determinants of Chinese firms’ performance by using the survey data of the firms that trade with North Korea in Dandong, China. The survey was conducted in 2012 and 2013 to assess the impact of the sanctions imposed by South Korea in 2010. 138 firms engaged in trade with North Korea are used in the analysis out of 174 sample firms. With special attention paid to the firms’ relationships with their North Korean partners, it finds that the business ties with army-affiliated North Korean counterparts have a stronger positive effect on the performance of Chinese firms than the ties with other counterparts. In particular, the business ties between the Han zu companies and the army-affiliated North Korean partners are found to be the most influential. This empirical finding suggests that North Korea’s “military first” polices de facto regulates resource allocation mechanisms in North Korea’s export sectors, after the imposition of South Korean sanctions. It also finds that Chinese firms that have more partners and formal dispute resolution channels tend to achieve more favorable outcomes in cross-border exchanges with North Korea, because these features function as hedge against the risk from North Korea’s unstable ‘Wa-Ku’ system.
The following chapters are all self-contained and can be read independently.

목차 (Table of Contents)

• Chapter 1. Introduction 1
• 1. Motivation 1
• 2. Objectives and Methodology 3
• Chapter 2. Economic Growth and Trade of North Korea with China: Cointegration and Granger Causality Test 6
• 1. Introduction 6
• 2. Data 11
• 2.1 GDP 12
• 2.2 Investment 13
• 2.3 Trade Data with China 17
• 3. Hypotheses 18
• 3.1 Conventional Socialism Hypothesis 18
• 3.2 Hypothesis Based on Conventional Growth Theory 20
• 3.3 Export-Led Growth Hypothesis 22
• 4. Empirical Results 22
• 4.1 Unit root tests 22
• 4.2 Tests for Optimal Order Length 23
• 4.3 Cointegration 24
• 4.4 Granger Causality Tests 28
• 4.5 Parameter stability test 31
• 5. Conclusion 37
• References 39
• Appendix 1: Bounds test procedures 41
• Chapter 3. The Impact of Economic Sanctions on North Korea – China Trade: A Dynamic Panel Analysis 43
• 1. Introduction 43
• 2. Empirical Framework 47
• 3. Data 53
• 4. Empirical Results 55
• 4.1 Basic Model: Sanctions’ Effects on Total Exports 55
• 4.2 Extended Model: Sanctions Effects by Trade Type 58
• 5. Conclusion 64
• References 67
• Appendix 1: Economic Sanctions of South Korea and Japan on North Korea 70
• Appendix 2: China Custom’s Trade Types (Customs Regimes) and Codes 71
• Chapter 4. The Performances of Chinese Firms in North Korean Trade: Evidence from Firm-Level Data 72
• 1. Introduction 72
• 2. Hypotheses 74
• 2.1 Business ties with North Korean partners 74
• 2.2 Market linkage 76
• 3. The Survey and Descriptive Statistics 77
• 3.1 Outline of Survey 77
• 3.2 Descriptive Statistics 79
• 4. The Model 83
• 5. The Results 85
• 5.1 Basic Regressions 85
• 5.2 Interaction effects 90
• 6. Conclusion 92
• References 95
• Appendix 1: Graphic Representation of Chinese Firms’ Business network with its North Korean partners 97
• Appendix 2: Graphic Representation of Chinese Firms’ Market linkage 103
• Chapter 5. Conclusion 106