China’s enigmatic relationship with North Korea was a hot topic during the recent FES-KISA 10th Annual Conference on “Trends in International Relations”, which was hosted in South Korea’s capital Seoul in November 2018. Yet one item in particular captured the audience’s attention — a photograph of a recently constructed Chinese cell phone tower. What was particularly curious about this image was this tower’s peculiar location. Although it was ostensibly constructed to serve China’s Jilin province’s booming telecommunications market, it was located roughly a solitary meter from the fence that marked China’s border with North Korea. It was perfectly positioned to provide network coverage into North Korea — where access to its network is strictly forbidden.
The Cellphone Revolution and “Black Market Chinese Phones”
This peculiar phenomenon bore relation to another topic — the spectacular growth of North Korea’s cellular phone market. It was revealed that from 2010 to 2013, the number of North Korean cellphone users rose 50 percent to over 2 million. A more recent report estimates that the number of currently registered smart phone users alone may already be double this. This official increase, moreover, has been complemented by the growing availability of unregistered, so-called “black market Chinese cellphones”. What is distinctive about these phones is that they contain smuggled Chinese SIM cards which enable their users to access China’s telecommunications and digital networks — provided they are in range of a Chinese cell site. In the eyes of these users, facilities like Jilin’s aberrantly located tower are without doubt a godsend. They are helping them breach the thick masonry of the hermit kingdom’s digital and telecommunications firewall.
Registered phones in North Korea are predominantly restricted from accessing international networks, and are subject to monitoring. Illicit “black market Chinese phones” subvert these restrictions. Many such phones are thus used to contact the outside world, such as relatives and friends living overseas, or Chinese traders. Amnesty International has heralded these phones as a symbol of how technological globalization is undermining closed states’ efforts to impose self-isolationism on their citizens. Yet this phenomenon also forms part of a much neglected yet equally significant story — China’s complex role in the “bottom-up” marketization of North Korea’s economy.
Black Market Chinese Goods and “Bottom Up” Marketization
Marketization has taken off in North Korea. According to some experts, it has already surpassed the levels seen in early post-Mao China, and in Eastern European states in the wake of the fall of the Communist bloc. A recent report undertaken by North Korean experts at Seoul university estimates that over 80 percent of North Koreans now do some form of business in unofficial sites of trade such as open markets — including a staggering 68 percent of Communist Party members. Notably, a rough average of 70 percent of the income of these North Koreans is derived from this trade. Amazingly, the South Hamgyong Province — which was decades ago the site of one of the most devastating famines in modern North Korea’s history — is now one of the most marketized regions in the country (80 percent). Even Pyongyang, where the enforcement of state regulation is strongest, has progressed to a stage where over 50 percent of the economy functions according to market principles.
These developments owe many thanks to a “bottom-up” process of marketization which began as a grassroots response to the state-controlled economy’s failure to avert widespread famine in the mid to late 1990s. The “up” part relates to the fact that these market activities have not only been quietly tolerated by North Korean officials — many have also become complicit or directly involved in their operation. More recently, higher organs of the North Korean state have also sought to harness these emerging market forces. They have become an increasingly important component of a state-sanctioned project of economic liberalization that is improving living standards and transforming the nation’s political economy.
Yet this phenomenon is at the same time creating headaches for the Kim regime. Pyongyang under Kim Jung-un has placed unprecedented emphasis on economic development. But it has been careful to do this in ways that strengthen rather than undermine the regime’s power (for instance, by building industrial conglomerates whose ruling families are loyal party affiliates, akin to South Korea’s chaebols). According to some, the dramatic explosion of illicit market activities is now causing Pyongyang to lose control over many of the levers of its economy it feels it needs to retain in order to bolster its political power. The influx of these “black market Chinese phones”, as with the flood of black market Chinese goods more generally, seems to be playing an important role in facilitating this.
China’s Role in North Korea’s “Marketization”
The phenomenon of “Chinese black market phones” thus invites us to re-examine prevailing ideas about the connection between China’s economic and political relationships with Pyongyang. Conventional views on Sino-North Korean economic cooperation tend to equate China’s economic largesse towards Pyongyang with political support for the Kim regime. In view of this, while it has long been suspected that China has been complicit in allowing unsanctioned or illicit forms of cross border trade, the general view has been that this helps the North Korean economy and thus increases political stability. The burgeoning trade of illicit goods such as “black market Chinese phones”, however, opens the possibility for a different narrative. Rather than supporting the Kim regime, China’s complicity in illicit trade could be feeding economic activities that are undermining the Kim regime’s preferred state-controlled economic model, and by extension, the regime’s political control.
Exerting Influence Through “Economic Measures”
This invites the obvious question: why would China do this to a fellow “communist” state and so-called “ally”?
Firstly, it is no secret that China wants Pyongyang to reform. Further marketization could hasten this process. Such a market-led reform, moreover, would arguably set North Korea on a path of “reform and opening up” similar to China’s own, predominantly successful example.
But a simpler reason could be that China is trying to manufacture a new way to increase its diplomatic leverage over Pyongyang, whose recent penchant for recalcitrance and “troublemaking” has caused Beijing more than a few headaches. This may be the case because, notwithstanding the recent successes of the 2018/2019 Kim-Xi meetings, Beijing is in a weaker position to leverage North Korea than was the case previously.
Even if China’s leverage begins and ends with de-nuclearization on the Korean peninsula, this would be an eminently worthwhile contribution to security both within and beyond the region.
In the past, a key source of Beijing’s leverage over North Korea lay in its capacity to defend North Korea militarily. However, in the wake of the recent flurry of nuclear and ballistic missile tests in North Korea, Chinese analysts generally concur that this is no longer the case. In view of this, Prof. Liu Ming, head of the Institute of International Relations of the Shanghai Academy of Social Sciences, has stated that Beijing now only has “economic measures” (jingji shouduan 經濟手段) at its disposal to exert pressure on Pyongyang.
The reality, however, is that this strategy has been tried before and has largely failed. For a long time, North Korean officials have insisted that trade and aid must not be accompanied with reciprocal obligations, or all offers will be rejected. When China’s President Xi Jinping tried to redress this by attaching conditions to aid/exports, he only succeeded in prompting furious recriminations and a sharp cut in bilateral cooperation. Moreover, while international sanctions and a recent growth of China’s material support for the regime have again increased the scale of North Korea’s economic reliance on China, the election of a more sympathetic government in South Korea has reopened new opportunities for a well worn North Korean countermeasure — hedging and economic equi-distance. North Korea has already used this strategy on a number of occasions to curtail Chinese influence — principally by engaging Russia, and to a lesser extent, friendlier South Korean administrations.
In view of this, the explosive growth of illicit cross border trade could be part of a new type of “economic measure” that aims to avoid the shortcomings and failures of the older approach. It is doing this by reducing Pyongyang’s role as the dominant intermediary for distributing Chinese resources directed at the North Korea economy and its people.
Cross Border, Bottom-Up Trade: Shifting the Nexus of Economic Leverage
Such an approach certainly does not tally with conventional models of dollar/yuan (or economic/market) diplomacy. However, for the Communist Party of China, this is a tried and to some extent tested strategy. Specifically, it appears to follow a method that communist China adopted during its campaign to absorb Tibet, and has used more recently to extend its influence in some small nations in Oceania and elsewhere.
The theory as to how this works is relatively simple. The supply of cheap commodities to a large impoverished demography creates new needs and aspirations for material prosperity. As these goods become increasingly essential to those who consume them, the need for them alters their political priorities and even challenges their existing political loyalties. Target governments can shut these supply networks down to stop this occurring, but doing so carries enormous risks, based on the logic that depriving people of existing comforts exacts a far greater political cost than failing to have ever provided them. Hence China could set out to whet the appetite of consumers knowing that only it has the capacity to satiate this appetite, and that its failure to do so (or its decision not to) would have severe political ramifications for the incumbent government. Gradually, a link will form between China’s dissatisfaction towards a nation’s diplomacy or political decisions, and that nations’ citizens’ dissatisfaction towards their government.
How Economic Diplomacy Can Work in North Korea
It could well be argued that while such a strategy could work with immature democracies, it would be less potent in the case of a totalitarian dictatorship. In the North Korean case, it would also be blunted by the fact that the Kim regime has largely promoted its political legitimacy on non-economic grounds, such as national security imperatives, and a cult of personality. Nonetheless, neither of these obstacles are necessarily insurmountable.
The recent efforts of Venezuela's quasi-dictatorship to block much needed foreign aid from reaching its people shows that non-democratic nations see such measures as threatening. But perhaps more importantly, recent changes in Korea’s political culture have created a more fertile ground for this strategy to gain traction. As argued by the economist and Korea expert Ruediger Frank, it is now the case that “Kim Jung-un has based his claim to legitimacy as North Korea’s leader on economic performance.” North Koreans have become more concerned about the quality of their lives, as opposed to their mere preservation. And a corollary of these developments is that material concerns are now more politically legitimate causes of political discontent.
However, the most important factor that could make this strategy potent is that it strikes at a core weakness of North Korea’s political economy. Pyongyang’s state-controlled system tries to ensure that the distribution of sought-after goods privileges loyal elites and binds prosperity to “top-down” patronage networks. Yet China’s black market trade undermines the distributive power that defines this system, produces more mercenary and less hierarchical trade networks, and can even reverse the direction of this top-down flow (i.e., illicitly supplied goods can go “up” the socioeconomic ladder). Not only does this countervailing economy shift the locus of economic power, it leaves the system exposed to the vagaries of a market which Pyongyang cannot hope to control. As long as North Korea continues to be the target of economic sanctions, the locus of such control will continue to lie west of the Tumen river.
Conclusion: Is China Doing Everyone a Favor?
The United States and its allies have often chastised China for not observing United Nations backed sanctions against Pyongyang. However, China’s role in feeding North Korea’s bottom-up market economy should be approached with a more open mind. The reforms in Pyongyang that China are seeking are certainly less ambitious than those of Western nations. However, China’s goals for regime reform are not in total conflict with those of the latter, and are without doubt more attainable. Perhaps most importantly, China is best positioned, both geographically and in other ways, to make such a strategy bear fruit. China may never push North Korea to respect the democratic will of its people. Yet even if China’s leverage begins and ends with de-nuclearization on the Korean peninsula, this would be an eminently worthwhile contribution to security both within and beyond the region.
 FES-KISA = Friedrich-Ebert-Stiftung - Korea International Studies Association