Chinese Economic and Strategic Gains from the Korean Crisis


2012-11-14 by Richard Weitz

The PRC-DPRK relationship is no longer based primarily on ideology but relies more on overlapping national interests and mutual economic ties.

  • Chinese policy makers continue to take steps to avert state failure in North Korea and counter other possible sources of chaos on the Korean peninsula.
  • China still provides the DPRK with essential supplies of food, weapons, and other economic and political support. According to various estimates, North Korea receives about half its food and almost all its oil imports from China.
  • In 2008, trade between the PRC and the DPRK reached $2.79 billion, up 41.3 percent since 2007, making China the DPRK’s most important trading partner.
  • Hundreds of thousands of North Koreans reside and often work in China.
  • PRC enterprises also own substantial investment in North Korea.

Chinese Economic Ties with North Korea

Although China provides much economic and technological aid to the DPRK, presumably some economic transactions occur due to commercial considerations that provide some benefits to the Chinese partner.

The Korea Trade-Investment Promotion Agency (KOTRA) estimates that Sino-DPRK two-way commerce reached a record $5 billion in 2011.

China’s main exports included automobiles, minerals, and machinery (as well as additional unilateral food aid and other assistance) to North Korea while importing minerals, timber, and natural resources from the DPRK, including growing quantities of the so-called rare earth metals considered of possible strategic trade significance. Border trade has grown as local Chinese governments and other enterprises have helped develop cross-border transportation and promoted joint PRC-DPRK ventures.

Official two-way investment is quiet low.

According to the PRC Ministry of Commerce, Chinese investment in the DPRK’s non-financial sectors amounted to only $300 million by the end of 2011, while total North Korean investment in China was merely some $100 million. But PRC managers, confronted with growing demands for Chinese workers for higher wages, are increasingly interested in outsourcing some labor-intensive operations to North Korean factories. According to one unnamed Chinese businessman cited in the PRC media, at least 8,000 Chinese nationals were engaged in commercial activities in the DPRK, primarily in the seafood sector. Although he cited cheap labor as one advantage of doing business in the DPRK, the businessman complained that inefficient DPRK infrastructure can delay deliveries and undermine a business’ reputation.

These growing economic ties with the DPRK, as well as the PRC’s security and other interests in North Korea, give many Chinese a major stake in averting additional economic sanctions, not antagonizing the DPRK leadership to such an extent that North Korea might retaliate against Chinese economic interests, and above all averting unfavorable regime changes in Pyongyang.

China gains from a divided Korea in many ways. They gain economically. They gain politically from protecting North Korean interests in the Six-Party Talks. And ironically, the more the US pushes the Chinese to deliver North Korea, the more influence China gets with Washington. Credit Image: Owl and Mouse

Furthermore, the PRC has undertaken a major campaign to preserve stability in North Koreas since the nadir of their bilateral relationship in 1992, when DPRK leaders denounced the PRC for moving closer to South Korea.

China helped the DPRK recover from its disastrous flood and famine a few years later which, along with other setbacks, almost resulted in North Korea’s becoming a failed state. The PRC supplied significant aid and devoted much leadership attention to rescuing North Korea.

Beijing has since been encouraging the DPRK to introduce Chinese-style economic reforms while also helping the DPRK to build the state capacity needed to implement them. For example, while deemphasizing food aid and other one-way transfers, PRC state-owned enterprises (SOEs) have helped the DPRK develop its natural resource and mining sectors by investing large sums of money, equipment, and other resources in North Korea as well as by engaging in the extensive training of local DPRK workers and managers.

In addition to reducing the risk of state failure in a neighboring state, the PRC benefits through such investments and local capacity building by securing large quantities of coal, iron ore, and other minerals from North Korea at prices often much lower than those on global markets. 

At some point, the Chinese leadership may need to choose between bolstering the DPRK’s economy and securing North Korea’s natural resources at bargain prices.

China has resisted imposing sanctions that could inflict severe harm on the fragile North Korean economy.

Although the PRC government voted in favor of UNSC Resolution 1718 (adopted on October 14, 2006) which condemned North Korea’s October 2006 nuclear test and imposing limited travel and trade sanctions, Chinese opposition forced the United States and Japan to abandon their efforts to push through a more strongly worded resolution that might have authorized the use of force.

With their Russian counterparts, PRC diplomats insisted that UNSC Resolution 1718 aim less to punish Pyongyang retroactively than to modify its future policies. The resolution imposed numerous sanctions on North Korea, but did not authorize UN members to enforce its provisions with military action. PRC authorities seem not to enforce some of these UN sanctions against North Korea and allow DPRK companies to operate on Chinese territory, which makes it easier for them to circumvent the sanctions.

Chinese Economic Ties with South Korea

Since China displaced the United States as South Korea’s largest trading partner in 2003, just a decade after the normalization of ties in 2002, bilateral trade has been increasing at an average annual rate of 22 percent.

In 2011, two-way trade between the two countries was recorded at $245.6 billion, an increase of 18 percent over the previous year. In 2011, the PRC accounted for 22 percent of South Korea’s total foreign trade, compared with a record low 9 percent for the United States. China has become the main destination of the ROK’s foreign direct investment, which has made South Korea China’s third largest source of FDI. The ROK has also become China’s third largest trading partner.

Despite their explosive growth, even their economic ties are a source of tension due to certain asymmetries in their commercial exchanges. Unusually, South Korea has an enormous trade surplus with China; it reached a record $70 billion in 2010. Conversely, some 30 percent of the ROK’s exports went to the PRC, whereas only five percent of China’s exports went to South Korea.

Dong Xiangrong of the Chinese Academy of Social Sciences believes that ROK officials fear that China will exploit these asymmetric economic ties for political advantage, perhaps by threatening to curtail bilateral trade if the South Korean government refuses to make concessions on their bilateral territorial or refugee disputes.

Another ROK concern is that China’s economic development and growing technological progress will make PRC firms a more formidable competitor in third-party markets for the high-tech consumer goods.

The PRC has been pushing for a China-Japan-ROK trilateral free zone to counter the U.S. campaign to bring Japan and South Korea into the rival Trans-Pacific Partnership, whose membership criteria effectively excludes the PRC.

Meanwhile, ROK constraints on economic intercourse with the DPRK have allowed PRC companies to emerge as the clearly dominant foreign business presence in North Korea, alarming ROK unification planners who fear the DPRK’s de facto absorption into the PRC’s economic empire.

China and the Six-Party Talks

Whatever the ultimate outcome of the international efforts to establish a stable and nuclear-free Korean Peninsula, China’s pivotal role in the Six-Party Talks has enhanced its international status.

PRC officials have been careful to characterize the talks as a “win-win” process in which all the parties have contributed and benefited.

In the summer of 2009, two Chinese scholars described the process as successful because Beijing “actively pursued multilateral diplomacy and played a constructive role in addressing hotspot issues.”

Until Beijing’s recent backtracking, China’s stance gained Beijing considerable popular support in South Korea, where the PRC has become the ROK’s leading trading partner. U.S. and other observers have seen securing Beijing’s support as essential for influencing the DPRK since the PRC is Pyongyang’s most important foreign partner, though Chinese officials caution that, while the Beijing’s influence over Pyongyang’s policies is greater than that of any other country, is still modest given North Korea’s adamant pursuit of its independent policies.

Although the long-term prospects for the talks remain unclear, Chinese leaders have basked in the enhanced international status they have achieved by essentially managing the Six-Party Talks.

Some American analysts consider ties with Beijing as the most useful mechanism for attaining U.S. objectives regarding North Korea. PRC Foreign Minister Yang Jiechi has also described the talks as a “win-win” process in which all the parties have contributed and benefited. In defending the February 2007 agreement, U.S. Secretary of State Condoleezza Rice underscored that, by working with China and through the mechanism of the Six-Party Talks, “We’re building a set of relationships” that could enhance multilateral management of Northeast Asian security issues regardless of the fate of the North Korean talks. Her successor, Secretary of State Hillary Clinton, has also described having good ties with China as useful for influencing Pyongyang’s nuclear policies.

Ironically, the advantages of sustaining this perception may have encouraged Beijing to moderate its pressure on Pyongyang in order to maintain tolerably good relations with the DPRK, which is why China is seen as a valuable partner for the United States and the other parties seeking North Korea’s de-nuclearization.

A harder stance toward Pyongyang by Beijing might earn some American gratitude, but alienating the DPRK would risk undermining China’s value in Washington with respect to North Korea.

Conversely, while U.S. officials may criticize Beijing for not pressing the DPRK harder to abandon the nuclear weapons business, they have declined to let these differences jeopardize their larger bilateral relationship.