Decomposing North Korea’s trade with China and revisiting the effects of sanctions

Abstract

This paper explores the impact of economic sanctions on North Korea’s foreign trade, focusing on the quality of trade. North Korea’s trade with China is decomposed into the extensive margin, relative unit price, and quantity, over the periods 1998–2024. Then I estimate sanction-induced changes in the former two elements of North Korea’s export to China. The decomposition results show that the growth of North Korea’s export to China is mostly attributed to the growth in quantity rather than quality. In the regression analysis, sanctions imposed by South Korea, Japan and the United Nations (UN) are used as key treatments. It is found that the recent UN sanctions reduced the extensive margin in North Korean exports, and Japan's sanctions imposed from 2003 onward depressed the relative prices of North Korean goods in the China's import market. The findings suggest that trade sanctions against North Korea have created implicit costs by preventing North Korea from trading with alternative partners, thereby increasing its reliance on China.