Effects of Economic Sanctions on North Korea–China Trade: A Dynamic Panel Analysis

Abstract

(ProQuest: ... denotes formulae omitted.)I. IntroductionEconomic sanctions are essential events in understanding North Korean economy in the 2000s. The United Nations Security Council Resolution (UNSCR) 1718 and 1874 were adopted in 2006 and in 2009, respectively, in response to the consecutive nuclear tests of North Korea. Multilateral sanctions included sanctions on weapon systems and sales of luxury goods to North Korea but did not sanctions on nonmilitary commercial trade (Haggard, and Noland 2009). In contrast, unilateral sanctions by North Korea's principal economic partners, South Korea and Japan, embodied much stronger measures.1 In the aftermath of the sinking of the Cheonan battleship in March 2010, South Korea suspended all trade relations with North Korea except for the Kaesong Industrial Complex (KIC). North Korea's trade volume with Japan also sharply dropped to zero after the complete trade embargo of the latter caused by the bilateral tension over the abductions of Japanese citizens.2Analyzing the effectiveness of the sanctions offers important implications to the South Korean government and international community for suggesting effective sanction strategies to stop North Korea from developing nuclear weapon programs that currently seem to progress considerably (Jeong 2013). Despite the implications, the effectiveness of the economic sanctions3 on North Korean economy remains unclear. Noland (2008) and Jeong and Bang (2011) report that the economic sanctions by UNSCR 1718 did not significantly affect North Korea's exports and imports. Lee and Kim (2011) observes a negative relationship between the sanctions by UNSCR 1874 and North Korea's aggregate exports but no apparent relationship between the sanctions and North Korea's imports. Lee (2010) finds that Japan's economic sanctions diminished North Korea's export to Japan, but the size of export loss was mostly compensated by North Korea's increased exports to other countries. Lee and Lee (2012) argue that South Korea's sanctions may incur significant adjustment costs to the North Korean economy in increasing exports to China, because North Korea's exports to South Korea are not easily transferable to the Chinese market.4 Exporting strategic goods, such as coal and iron ores, may also deteriorate North Korea's domestic productions.Despite differences in the effects of the sanctions North Korean trade, most studies have reached a consensus on the limited effect of the sanctions in damaging the North Korean economy as a whole, indicating that the expanded trade between North Korea and China, North Korea's largest trade partner, relieved a considerable amount of pressure imposed by both multilateral and unilateral sanctions (Mimura 2005; Whitty et al. 2006; Noland 2008; Haggard, and Noland 2009; CRS 2010; Lee, and Kim 2011; Jeong, and Bang 2011; Lee, and Lee 2012).In this regard, this study addresses the question whether North Korea-China trade dilutes the effects of the sanctions, and if so, to what extent and in what way. For a clear analysis, this study focuses on changes in North Korea's exports caused by the unilateral sanctions applied by South Korea and Japan. Strengthening multilateral sanctions mainly targeting North Korea's import is difficult because of informal and illicit cross-border trades and the lack of Chinese cooperation in the border areas (Haggard, and Noland 2009; CRS 2010). From this perspective, evaluating the effects of the sanctions on North Korea's exports rather than imports is critical because the matter is directly related to the amount of cash flow blocked by the sanctions that may be used for military development.This study extends the existing literature on the effectiveness of sanctions against North Korea in two aspects. First, we construct a unique panel dataset of North Korea's bilateral trade with China, South Korea, and Japan at Harmonized System (HS) 4 digit-commodity code level5 from 2001 to 2012. …