Laudable? Lawdy, No! How South Korea’s Spurious Self-Effacement Messes Up North Korea’s Trade Data

Ruediger Frank is one of the very best authorities we have on the DPRK economy. As readers of 38 North well know, he is equally adept at incisive abstract analysis and informed first-hand observation in this vital area. His latest article, “North Korea’s Foreign Trade,” is no exception. Frank has done us all a service, especially those with few to no Korean language skills,[1] in summarizing and discussing key points and issues from KOTRA’s latest meaty (151 pages) report on this topic, published on September 30 and including a wealth of data through 2014.

Overall, Frank’s article maintains his customary high standard. But I do have one bone to pick with him. Quite a long way into his article (after seven paragraphs and five graphs) he drops a rather important bombshell. As I would put it, everything he has talked about so far isn’t, in fact, everything. KOTRA’s purported study of DPRK trade actually leaves out one crucial country: its second largest trade partner (the ROK) and indeed the only one which really matters apart from the number #1 (China). This is because, toeing the official line of the ROK government, KOTRA excludes inter-Korean trade—on the ground that it is not ‘foreign.’

Astonishingly to me, Frank not only condones this major omission but calls it “laudable.” By contrast, another commentator on the new KOTRA report, Stephan Haggard flags this as a problem, and helpfully provides a chart adding in North Korea’s commerce with the South. (Haggard has previously criticized KOTRA’s statistics on several other interesting grounds, and he now notes a vast $500 million discrepancy on the 2014 DPRK-China figures between KOTRA and the UN’s Comtrade database; but all that we shall bracket for present purposes.)

In fairness and for convenience, let me quote Frank’s reasoning in full:

The omission of inter-Korean trade is one of the laudable features of the KOTRA report. This might be primarily an ideological decision, along the logic that if trade with North Korea is treated as foreign trade, this would constitute a de facto recognition of that country as an independent state—which South Korea refuses to do. But no matter what the reasons are, excluding inter-Korean trade makes good economic sense. Why?

Because since the halt in inter-Korean economic activity under the South Korea’s May 24th Measures, the only noteworthy economic exchange between North and South Korea these days takes place at the Kaesong Industrial Complex (KIC). South Korea sends semi-finished products and raw materials to companies operating in the KIC; these count as North Korean “imports.” They are then processed in the KIC by 124 South Korean companies using North Korean labor. The processed goods are sent back to South Korea and recorded as North Korean “exports.” Technically, it is hard to deny that this is trade. But in fact, South Korea is mainly trading with itself. This case reminds us to be careful with numbers unless we understand where they come from, otherwise we might be misled to believe that the two Koreas have a brisk exchange of various locally produced goods and services in the range of $1 billion annually, which is just not the case. All that happens is that roughly $100 million per year is transferred from South to North, in the form of wages for the 54,000 female workers in the KIC. But not a single South Korean product makes it to the North Korean market (well, not this way at least), and neither is this the case for North Korean products in the Southern market. This should be considered when reading headlines about the Kaesong Industrial Complex having reached an accumulated production volume of $3 billion in early October 2015.

I’ll return later to some of those specific points. On the general issue, I wish to argue the exact opposite. South Korea’s self-exclusion from the North Korean trade picture is not in the least laudable. Rather, it is deplorable, spurious and infuriating, for at least four distinct reasons: 1) it is methodologically inexcusable, departing from normal international statistical practice; 2) this, in turn, breeds error and confusion, since global media tend to take everything Seoul says about the North as gospel; 3) this stance precludes an accurate account of North Korea’s recent economic history and the Sino-ROK contest for hegemony in Pyongyang during the last two decades; and 4) last, but not least, it obfuscates the strategic choices facing Seoul now, thereby raising the risk of perpetuating the self-harming policies of retreating from any attempt to engage with and influence North Korea which Seoul has pursued since 2008.

Inter-Korean or Intra-Korean?

Methodology and universalism first. On motivation, Frank is correct: this is driven by politics and ideology. South Korea’s official stance is to treat trade and other dealings with the North as “intra-national” rather than international. However, it is not just the ROK which refuses to recognize the other Korea as a separate state. I had thought right-wing motives were in play—but actually it’s mutual, agreed and in writing. The term “intra-Korean” appeared (for the first time?) in the inter-Korean Basic Agreement of December 1991. Chapter 3, clause 15 reads:

In order to promote the integrated and balanced development of the national economy and the welfare of the entire people, the South and the North shall engage in economic exchanges and cooperation, including the joint development of resources, the trade of goods as intra-Korean commerce and joint ventures. (Emphasis added.)

Similarly, Clause 17 declares that “South and North Korea shall implement freedom of intra-Korean travel and contact.” (Read and weep, a quarter-century on; but that’s another story.)

A rare thing which both Korean states agree upon is that at some level they form a single nation. This is what drove North Korea’s decades-long refusal of separate UN memberships: Korea is one, ergo it should share a single seat. That absurd posture collapsed in 1991 when the USSR and China refused to wield their vetoes any longer so as to keep out the ROK. Each Korea’s subsequent acceptance of the other’s UN membership amounted to tacit mutual recognition. In any case, metaphysical niceties of abstract nationhood have no place in trade statistics, and to impose them there is to commit what philosophers call a “category-mistake.”[2]

For the record “intra-national” may be problematic in international law too, though this is not our concern here. In a 2007 paper proposing closer formalized inter-Korean economic ties, Lim Soo-Ho of the Samsung Economic Research Institute (SERI)[3] begins a section headed “Inter-Korean Duty-free Trade and International Scrutiny” (page 11) with this warning:

Currently, no duties are imposed on inter-Korean trade; it is treated as “intra-national trade” by the South. South Korea even offers subsidies to businesses and financial institutions that participate in trade with North Korea. Such views on inter-Korean trade, however, are not generally recognized in the international community, and in fact, the customs exemption directly violates South Korea’s obligations as a WTO member. This exposes South Korea to possible litigation from other WTO members. Since inter-Korea trade is very low, the litigation risk is not high. But if trade accelerates, the danger obviously would increase. South Korea cannot afford to be complacent about the status quo.

Whatever the legal niceties, the objective position is clear. The Korean peninsula currently contains two sovereign states, internationally recognized as such. This “two kingdoms era” has lasted for two-thirds of a century. Hence, entirely properly, all authorities whose remit is to compile trade and related statistics, whether at national or international levels, have separate boxes for the ROK and DPRK. Now, if the latter box is often blank, that is a different issue. (So is the fact that some countries’ customs data now and then muddle up the two Koreas, creating quite imaginary phantom surges in North Korean trade that confuse the excitable and unwary.)

De facto, the ROK is one state and the DPRK is another. Since nowadays they trade with each other, there can be no valid reason to exclude such commerce from overall trade statistics—especially since trade with the South looms very large in the North’s economy (the reverse is not the case), such that omitting it seriously distorts the overall picture. More on that below.

Beijing Does It Better

A good parallel is China. Given current (indeed chronic) debates over the credibility of PRC official statistics, it may seem surprising to cite Beijing as a model. Then again, compared to North Korea, China often looks a paragon of virtue and good practice in many fields—statistics included.[4]

It is rarer to tout China as a model for South Korea to emulate, and in few areas would that be true. But one such is not letting the politics of national division muck up your trade statistics. If the PRC were to do as the ROK does, it would exclude trade with Taiwan as being “intra-Chinese.” Fortunately, China does not let irrelevant sensitivities trump common sense and good practice. Chinese customs statistics have no qualms about listing Taiwan among other countries as a trade partner, even if they are careful to call it “Taiwan Prov[ince] of China.”

What of Frank’s arguments for not counting inter-Korean trade? He claims this is not really trade, because since 2010 it has consisted solely of the Kaesong Industrial Complex (KIC); hence “South Korea is mainly trading with itself.” This implicitly elevates Ricardo’s classic model of trade (English cloth for Portuguese wine) into a Weberian ideal type, where country A trades its products for those of country B. But in our era of global supply chains, so pure a transaction between separate entities hardly applies; think how many nations the parts in your cellphone hail from. The KIC may be an extreme case, but it is far from unique—even for North Korea. Anecdotal evidence suggests that at least some, possibly much, of the 25 percent of DPRK exports comprised of textiles is produced on a not dissimilar basis by Chinese firms, which send materials in and re-export finished garments. Is this China trading with itself? In the wider region, such structural cross-border production chains obtain par excellence between mainland China and Hong Kong. That is why China follows global practice in listing Hong Kong, and Macau, as separate entities in its trade statistics—even though both are now part of China. If they did it Seoul’s way, logically these too should vanish from the stats since trade with them is “intra-Chinese.” But that would be nonsense, as is the ROK’s self-effacement.

Purveyors of Error

Why does this matter? Because it is wrong, factually and, in my view, ethically. In Seoul and beyond, KOTRA’s figures get picked up and regurgitated by secondary sources, ignoring or ignorant of the caveats. Thus is error spread. I offer two examples; one could cite many.

In May last year, Yonhap reported an earlier KOTRA study of DPRK trade. The quasi-official ROK news agency didn’t see fit to mention—or perhaps didn’t notice, or temporarily forgot—that inter-Korean trade was missing. As a result, the aggregate figures, judgments and trend assessments which Yonhap offers are mostly wrong or misleading. As I wrote at the time:

Yonhap…says North Korea’s trade in 2013 totalled $7.34 billion, up 7.8% on 2012. False. The true total was $8.49 billion, of which $1.15 billion (13.5%) was with South Korea. Up 7.8%? No, actually down 3.3% from 2012’s $8.78 billion, which included a record $1.97 billion in inter-Korean trade.

Having noted (but exaggerated, by excluding inter-Korean trade) the dominant role of China, Yonhap says that “Russia, another North Korean ally, was the country’s second-largest trading partner in 2013, with bilateral trade volume spiking 37.3% to $104 million.” This suggestion that the DPRK’s two political allies are also its main trade partners is both loaded and untrue.

China yes, but Russia “second largest” with a puny $100 million? In fact, even with Kaesong out of action for almost half of 2013 when the North withdrew its workers, inter-Korean trade was still eleven times larger than the trickle with Moscow. Despite much hype about warming ties, Russia ranks not second but a very distant third. The true number two is the ROK, whose self-erasure in this context is borderline mendacious. Indeed as Ruediger Frank notes, in 2014, DPRK-Russia trade actually fell slightly to $92 million. Face it, Russia is small potatoes here.

Once sown, errors spread. Ian Bremmer, the influential founder-leader of the political risk consultancy Eurasia Group, is a much-quoted pundit who often posts numbers on Twitter. In April 2014, he tweeted the following (no source given, but no doubt the same KOTRA report):

Bremmer has 134,000 Twitter followers; that tweet was retweeted 38 times. But it is wrong, twice over. One error is Bremmer’s, or his staff’s: These numbers are actually what North Korea imported, not exported. But as to the other, his ROK sources have misled him. Spot the missing country. The true #2 was, of course, South Korea, with $532 million.[5]

My third gripe with the ROK’s disappearing act is that it distorts recent history. Inter-Korean trade may be narrowly based on the KIC now, but it wasn’t always. The Sunshine Policy era (1998-2007) saw South Korea and China competing for economic, and by extension political, influence in the North. As the figures show—a 2012 Korea Herald article has useful graphics, under the revealing headline “Concerns mount over China’s grip on N.K. economy”—during the decade of sunshine, North Korea’s commerce with the South was steadily catching up to the front-runner, China. By 2007, inter-Korean trade had reached $1.798 billion, snapping at Beijing’s heels; Sino-DPRK trade in that year totalled $1.974 billion. Indeed, on one side of the ledger South Korea overtook China, briefly becoming the North’s top export market.

That was then. We know what followed: regime change in Seoul, which took its bat home and left the field to China. I analyzed that tragic error in depth for 38 North, later summarizing the case in the Financial Times under the headline “South Korea has lost the North to China”:

Larger plans were afoot. In 2007, at the second North-South summit, accords were signed for co-operation on shipbuilding, mining, transport and more. A plethora of new joint committees started work quickly to implement all this. For once the Koreas talked business, not politics. [But] nothing came of it …South Koreans elected as president Lee Myung-bak, who insisted the North must first give up nuclear weapons. The agreements were aborted and a downward spiral began. In May 2010, after the sinking of a South Korean warship, Mr Lee banned all inter-Korean trade and all investment except at Kaesong.

For present purposes, the point is: We simply can’t tell this story without the trade numbers. South Korea must be counted in, because it counts, and could count more, if only it so chose.

That leads to the fourth issue. All this bears directly on strategic choices the ROK faces now. Frank’s point about the narrow basis of current inter-Korean trade can be turned on its head. If Kaesong alone can generate record North-South trade last year of $2.34 billion, imagine what could be possible if only the two Koreas would establish, or re-establish, wider trade and investment relations, not confined to a single industrial park but on a nation- and peninsula-wide basis.

Or rather, no need to imagine; just look south. China and Taiwan illustrate what can be gained by a pragmatic approach, where political differences are not allowed to impede the pursuit of win-win mutual business. This, in turn, eases political tensions, while not eliminating them: the big issue in Taiwan politics now is whether ties with China have grown too close for comfort. Differences in both physical scale and economic performance mean South Korea would never face such a risk—though North Korea might. Cross-straits trade of $197 billion in 2013, 100 times bigger than inter-Korean trade, should galvanize Seoul into emulating Taipei’s example.

Earlier this year in July, the Federation of Korean Industries (FKI), which represents large conglomerates (the chaebol), outlined a new approach to North Korea based on “mutual profits.” Implementing this would require repeal of Seoul’s ‘May 24 measures,’—the unilateral sanctions imposed after the sinking of the Cheonan and shelling of Yeonpyeong Island in 2010. Those were never logical: banning trade but exempting the KIC is like banning all cars except Toyotas. There is increasing recognition in Seoul that this has proved an own goal. Like UN and all other sanctions, the May 24 measures have palpably failed to squeeze Kim Jong Un into apologizing, suing for peace or changing his ways. If anything, North Korean “economic conditions appear to be improving,” according to a Congressional Research Service report in July. “Why is North Korea growing?” Marcus Noland recently asked. With South Korea’s own economy faltering, there are even suggestions of the North as a new growth engine.

South Korea’s Nordpolitik needs a reset. To flesh that out would take another article (I raised some critical issues here before.) Hopefully as part of that process the South might reconsider its queer statistical self-effacement. Otherwise it can hardly think straight about North Korea.

Epilogue: Why All This Bugs Me

As a personal coda, let me explain my particular interest in this issue. For three decades, from 1983 till 2012, it was my anonymous privilege to write lengthy quarterly Country Reports on North Korea for the Economist Intelligence Unit. (I still contribute to the EIU on both Koreas, but nowadays they only want short pieces.) If the reader detects any exasperation above, it is because of having to recalculate the figures every single time BOK, KOTRA et al. publishes a report on DPRK trade, so as to do my duties by the EIU’s subscribers—and the truth—by recombining what the ROK government has perversely separated. Frankly, this is a pain. Hence my slight surprise and alarm to find my good friend Ruediger Frank endorsing South Korea’s dodgy habits. I don’t know if this article will be convincing to him, and many previous pleas to Seoul to change its statistical ways have fallen on deaf ears. But one lives in hope.

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[1] As someone else who has long toiled in the stony vineyard of DPRK economic spadework, I regret that KOTRA, which a decade ago was glad to share its work on North Korea with the wider world via its cosily named and very useful “NK Club”—a glimpse of what we have lost can still be found here, but alas the links don’t seem to open—no longer sees fit to translate such studies into the global language. Ironically, this latest report was posted on a KOTRA web portal called Global Window: those words alone are in English, but everything else is in Korean. A one-way window looking out, but no one else may peer in. I was told that killing their English output on the DPRK was a cost-saving measure. If so, it is short-sighted and narrow-minded. The point is a wider one: KOTRA is not alone in such culling. Some 38 North readers may recall Hyundai Research Institute’s former journal Economics of Korean Reunification. (I declare an interest, having had three articles published there.) This was a very useful forum and resource. But for some years now HRI has published nothing in English, not even about South Korea. Here too the reasons could well be financial, given the chronic (and recently intensified) travails of HRI’s parent Hyundai Group. KOTRA has less excuse, as a state agency under the trade ministry MOTIE. The paranoid in me suspects that narrow Korean nationalism (uri nara) is at work here: some in Seoul don’t really want to share the North with foreigners, intellectually and otherwise.

[2] Any reader who thinks that to talk thus tramples on Koreans’ national trauma and longing for unification is, with respect, similarly misguided. I do feel your pain, but that isn’t the issue.

[3] SERI is another leading ROK think-tank which bizarrely has now turned its back on the world. It used to offer high-quality analysis on Korean peninsula economic and social issues, but its English website—still touting “Native Expertise on Korea and East Asia”—is frozen in 2013, while the site of the journal SERI Quarterly is dead (but it still has a Facebook page, albeit deserted). For the research arm of South Korea’s largest conglomerate, whose success incarnates globalization par excellence, this represents a sad and inexplicable retreat. Hopefully a successor generation will reverse it.

[4] The well-sourced claim that China refused to allow the DPRK to join its newly created Asian Infrastructure Investment Bank (AIIB), because Pyongyang wouldn’t or couldn’t supply even the most basic macro-economic data, has not been convincingly denied.

[5] In passing, note that Russia’s $103 million in exports mean it imported almost nothing from North Korea.