Magazine

Lifeline From China


After North Korea's July 4 fireworks -- seven missile tests launched toward Japan -- it would be easy to assume that the hermit kingdom is more isolated than ever. Don't tell that to the residents of Dandong, a bustling border town in northeastern China.

The city of 800,000, a gritty combination of chaos and glitz, is booming in large part because of thriving trade with North Korea. Streets are lined with small guesthouses catering to North Koreans, while restaurants serve up Korean specialties such as cold noodle soup and spicy kimchi. And just hours after the missiles flew, hundreds of trucks resumed their daily parade across the Friendship Bridge, the main passage over the Yalu River dividing the two countries.

In front of the fortress-like truck inspection station on 10 Wei Rd., florists do a brisk business selling elaborate bouquets to North Koreans seeking to honor Great Leader Kim Il Sung, who died in 1994. But there's more going on than selfless acts of northern nationalism. Across the street, dozens of small shops offer goods ranging from used Sony (SNE) and Panasonic (MC) televisions to gas generators, cooking oil, and toilet paper that truckers and other visitors haul across the river. "The North Koreans who come to China are very rich.... All they use are U.S. dollars," says one shopkeeper. "They buy all of this from us, then go back and sell it for a profit in their own country."

The cross-border traffic is just the most visible piece of the strengthening trade ties between North Korea and its giant neighbor. From 2000 to 2005, North Korean imports from the mainland (including oil, pork, electronic gadgets, and farming machinery) more than doubled, to $1.1 billion, while its exports to China (fish, low-grade steel, and minerals) soared more than tenfold, from $37 million to $499 million, according to the Chinese customs office. And by some estimates, informal trade and smuggling could double those figures. Throw in the $715 million in goods shipped from South Korea, about half of which was humanitarian aid such as rice and fertilizer, and North Korea is actually looking less isolated than it has been since its communist trading partners disappeared with the collapse of the Soviet Union.

The growing trade has been a lifeline for the North. Gross domestic product has expanded by about 2% annually since 2000 -- but without trade and aid from China and the South, the country's economy would have contracted, reckons economist Lee Young Hoon, who monitors North Korea at the Bank of Korea, the South's central bank. "Trade with China won't make North Korea prosper, but it allows Pyongyang to muddle through," Lee says.

Add it all up, and there's little reason to expect U.S.-led economic sanctions against North Korea to work. In an effort to force Pyongyang to abandon its nukes, Washington has tried to block the flow of capital, technology, and goods to the North. But Beijing and Seoul have opposed such measures. "Sure, there will be lots of harsh rhetoric and talk of punitive action," says Paik Hak Soon, a North Korea expert at Sejong Institute, an independent think tank in Seoul. "But there's no effective countermeasure unless China and South Korea make a strategic decision to let North Korea collapse."

That's not going to happen anytime soon. Neither neighbor wants to see millions of refugees stampeding across the border. Beijing has enough trouble keeping its own economy on track and doesn't like the possibility of U.S. troops -- currently stationed in the South -- sitting right up against its frontier in the event the two countries were to reunite. In any case, Seoul wants the North to narrow the huge economic gap between the two before that happens.

China also has more prosaic reasons for encouraging trade. The northeast has been largely left out of China's economic transformation of the past two decades. Lately, though, the region has benefited from a policy letting specially licensed traders in border areas import goods at about half the average duty of 12%, the Bank of Korea says. The reduced tariffs and relative ease of moving goods across the border have prompted North Korean merchants and state-run trading companies to use Dandong and nearby cities as a gateway for their business deals with the rest of the world.

That has transformed once-sleepy Dandong. New apartment blocks and office towers are rising along the riverfront. A block away from the water, Binjiang Road glows with bright red, yellow, and gold neon signs announcing seedy saunas and crowded pool halls frequented by Chinese, Russian, and North Korean dealmakers.

Across the river, the North Korean city of Sinuiju practically vanishes at night. The waterfront is little more than dilapidated quays, shabby warehouses, a long-idle Ferris wheel, and rusting boats pulled up on the shore. To conserve electricity, typically available for only a few hours a day in much of North Korea, buildings in the city of 350,000 are barely lit at all. The only visible glow comes from an enormous statue of the Dear Leader, the name used for dictator Kim Jong Il. "You can't get lost," says one Dandong native who has been trading over the border since 2000. "Just look for the only light, and that's where you'll find a statue of the leader."

WARNING SHOTS

Despite the gloom, trade has injected new life into the North. Recent visitors say once-barren shops are brimming with Chinese-made TVs, refrigerators, bicycles, and other goods. And wholesale markets for raw materials and machinery have been set up in Pyongyang and elsewhere, visitors say. But as economic activity picks up, the shortage of supplies is felt even more acutely. "Every factory wants more raw materials, and the cash-strapped country simply can't meet demand," says Jo Dong Ho, a North Korea expert at the state-funded Korea Development Institute in Seoul, who visited the North in May.

In fact, the missile tests may have been a ploy aimed at breaking a diplomatic impasse that's heightening the financial stress on Kim's regime. North Korea wants China's help in releasing $24 million frozen at Banco Delta Asia, in the Chinese enclave of Macau, following charges last year by the U.S. Treasury Dept. that North Korea used the bank to launder proceeds from counterfeiting U.S. currency and other illegal activities. "The missile tests illustrate that North Korea is unhappy with China," says Yan Xuetong, director of the Institute of International Studies at Tsinghua University in Beijing.

China, in turn, was clearly miffed by the test and dispatched a top envoy to Pyongyang to express its concern. But unhappy enough to stop the flow of trucks across the Friendship Bridge? Unlikely.

By Moon Ihlwan and Dexter Roberts


Too Cool for Crisis Management
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