The last two days I have been participating in a conference on Korean unification co-sponsored by the Brookings Institution, the Australia National University, and Korea University. One of the more interesting presentations was of work by Jangho Choi and Sojeong Im of KIEP on North Korean sanctions evasion strategies. The novelty was an analysis of “detour trade,” in which firms use bonded warehouses in China to effectively disguise trade with North Korea.
They demonstrate that since 2009 bonded imports from North Korea have risen steadily, even after 2013, when ordinary imports, processing on commission imports, and border trade imports all began shrinking. By 2015, bonded trade was the largest component of both China-DPRK exports and imports.
Choi and Im examine the most disaggregated trade data available at each individual port and associated bonded warehouse to identify North Korea pass-through trade. They term this mislabeled trade “detour trade.” They conclude that “from 2007 to 2015, the estimated detour export [i.e. goods from North Korea mislabeled as Chinese and exported to third countries] has increased almost fourfold, and in 2015 reached a total of $697 million, which is slightly more than 25% of North Korea’s total exports in 2015.” This detour trade consisted mainly of textiles. The leading destination was South Korea, followed by the US, Japan, the Netherlands, and other countries.
“The North Koreans are disguising the exportation of textiles and apparel in exchange for capital goods.”
Detour imports exploded in 2010, increasing from roughly $100 million to nearly $500 million, though there has been some decline since 2013. About half of the trade expansion has consisted of machines and instruments. The major sources of these products were South Korea and Japan.
In short, the North Koreans are disguising the exportation of textiles and apparel in exchange for capital goods. The largest single trade partner in this sanctions evasion scheme is South Korea, though Choi and Im argue that there is some evidence in recent years of a shift toward China. Choi and Im argue that textiles may be emerging as the export alternative to mineral exports currently under sanction.