What Should North Korea’s Trade Pattern Look Like?

November 18, 2013 5:30 AM

In my book Avoiding the Apocalypse, I used a standard gravity model to estimate a counterfactual: what would North Korea’s trade pattern look like if it were a “normal” country? That is, if it traded like a typical country with its size and income level and other relevant characteristics such as distance from foreign markets. In that experiment, performed on data from 1990, there would be a tremendous expansion in the volume of trade, and the partner composition would shift away from China and toward South Korea and to a lesser extent Japan.

Out of curiosity, I have updated that earlier calculation. The underlying gravity models are not precisely the same: in the earlier exercise I simply used a model estimated by Jeff Frankel and Shang-Jin Wei which was sitting on the shelf. This time around, it was easier just to re-estimate a modified version of a model originally published by Andy Rose in his American Economic Review paper. In this model, the volume of trade between two countries is a function of:

  • The sizes of their economies and levels of income;
  • Geographical distance;
  • Whether the countries share a common currency, common language, and/or contiguous border;
  • Whether one or both are members of the WTO, and/or whether there is a regional trade agreement in force between the pair, and;
  • Whether one is a colony of the other, or if the country pair shared a common colonizer post-1945.

We estimated the model for the period 1984-2006, which contained about 473,000 unique observations. For this purpose, we used a linear estimator and did not delve into the issue of truncated or censored samples which has attracted a lot of attention in recent years. If we did, the parameter estimates would bounce around a bit. Then what I did (or more accurately, what Kevin Stahler did) was plug in North Korea’s values in 2006  for those explanatory variables and generate the counterfactual projection.  (Truth in advertising: those North Korean values were taken from the UN data base that I questioned in a recent post.) Anyway, those results, along with the earlier results from my book, are shown below.

 

gravity trade shares

The obvious deviation between current reality and what North Korean might look like as a “normal” country is the tremendous increase in trade with South Korea and the relative decline in reliance on China. Indeed, both sets of gravity model results suggest that if North Korea exhibited the trade pattern of a typical country, trade intensity with China would not be much higher than that with Japan. The bulk of North Korea’s trade would be with those three partners; Russia, the US, and Europe are distant also-rans.

The model has only been estimated for overall trade. The results would change to some degree if separate gravity models were estimated for disaggregated commodity categories.

Nevertheless, the main message shines through as it did then I first did this calculation more than a decade ago: North Korea’s natural trade partner is South Korea. Not trading with the South imposes real economic costs on the North. But then again, if South Korea really did account for 60 percent of North Korea’s trade, well, that would change the political tone of the countries’ interactions considerably, something of enormous sensitivity in Pyongyang, no doubt.

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