does foreign trade policy matter

8/7/2019 Does Foreign Trade Policy Matter

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May 3, 2011

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Does Foreign Trade

Policy Really

Matter?The Two Koreas

Andrew J. Marsiglia, PhD, CCP


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www.lead-inspire-com | Does Foreign Trade Policy Matter? 1

Does Foreign Trade Policy Matter? The Two Koreas

Andrew J. Marsiglia, PhD, CCP

Introduction

Economic autarky is a phenomenon where a country desires to remain self-sufficient by

severely restricting or even eliminating foreign trade. A modern example of this condition

is North Korea where itsCommunist governments policy of self-reliance known as juche,

or a state of self-reliance, in which it maintains a centrally controlled stagnant economy

that is largely isolated from international contact. In contrast is South Korea, that has a

vigorous economy energized by robust foreign trade and is tightly integrated into

international social, political, and economic systems.

Present Conditions

North Korean economy can be characterized by state ownership of means of

production; centralized economic planning; the lack of basic freedoms necessary for a

market economy (such as freedom of movement and of commerce); political repression;

and an emphasis on military development (military-first policy). The economic system is

designed to be self-reliant and closed (Nanto & Chanlett-Avery, 2009, p. 1). The countrys

policical leaders have acute mistrust of foreigners especially from capitalistic countries

whom they regard as trying to reap profits at the expense of the North Korean people and

well as introducting liberal political ideas.

The North Korean government has typically conducted foreign trade with China, the

Soviet Union, and its sattlite nations. Before dissolution of the soviet Union, exports

primarily consisted of low quality goods distributed to eastern bloc consumers. Imports


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typically consisted of limited amounts of fuel and agricultural products from both China

and Russia. North Korea, however, does not export enough to pay for its imports and this

generates a deficit in reported merchandise trade that must be financed by other means.

Experts point out that North Korea has used its military threat to extort aid and other

transfers from the United States, Japan, South Korea, and the humanitarian agencies to help

finance a meager flow of imports.

Despite its autarkian philosophy, the North Korean government has established several

special economic zones modeled on the Chinese coastal economic zones. These zones

include the Rajin-Sonbong Free Economic and Trade Zone, the Sinuiju Special

Administrative Region on the northwestern border with China, and the Kaesong Industrial

Complex along the border with South Korea (Nanto & Chanlett-Avery, 2009). The Kaesong

Industrial Complex has been moderately but continuously successful since its inception

largely because the South Korean business-people have demonstrated insistence at trading

with its neighbor despite frequent and often serious political and economic infractions

(Lee, Kim, & Lee, 2009).

The Main Problem

North Korea has a comparative advantage in unskilled and semi-skilled labor but they

are not massively employing it in foreign trade activities as is their Asian neighbors such as

China. According to Adam Smith, it would benefit each country to specialize in producing

the good in which it has an absolute advantage and to import the good in which it has an

absolute disadvantage (Yarbrough & Yarbrough, 2007, p.27) but North Korea is doing

neither resulting in a stagnant economy. In addition, North Koreas military-influenced

political system has caused government leaders to make frequent inexplicable decisions


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that have resulted in mistrust by foreign capital investors and potential trading partners.

Nanto (2009) points out another salient problem, The economic practice of juchehas

minimized international trade relations, discouraged foreign direct investment, and

fostered what it considers to be core industriesmostly heavy manufacturing (p. 23). The

country does not enjoy a comparative advantage in capital or heavy manufacturing so their

present economic focus further limits North Koreas productivity and does not contribute

to its welfare.

Possible Solution

Countries that have an autarkian economic philosophy fail to maximize their

comparative advantages and in so doing, limit their productivity and gross domestic

product. The United States was an autarky from 1807 to 1809 as was Japan until 1850.

Leaders in both countries soon concluded that free trade was the path to economic vitality

(Irwin, 2005). Nazi Germany is a prime 20th century example of economic self-sufficiency

failing to provide any of the benefits sought by government leaders (Leitz, 2002). In the

21stcentury North Korea remains in autarky despite the plethora of examples showing the

folly of this restrictive economic perspective.

Fortunately, there is a glimmer of hope for the North Korean economy. North Koreas

leaders are cognizant that their country has been by-passed by the wave of commercial

growth that has elevated the economies of China, Thailand, South Korea, Taiwan,

Singapore, Malaysia and they have expressed desire to participate in this economic miracle

(Nanto & Chanlett-Avery, 2009). According to Lee (2009, p. 281), an economic late-comer

like North Koreas would typically take one of the following three paths to ascend to a

higher level of performance:


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1. Path-following catching-up, in which late-comers follow the path taken by theirforerunners.

2. Stage-skipping catching-up, which means that the late-comer economies or firmsfollow the forerunners path to an extent but skip some stages.

3. Path-creating catching-up, which denotes that the late-comers explore their ownpaths of technological development.

The most productive path would path two, stage-skipping. This approach promises to be

effective because South Korean business people and government have exhibited

determination to invest in North Korea their involvement could provide a unique form of

economic leadership for North Korea. Lee (2009) stated, In terms of export-orientated

growth, with significant South Korean investment, North Korea could enjoy the early

advantage of marketing and brand capacity already established by South Korean firms (p.

288).

Conclusion

Autarky limits a country from exploiting its comparative advantages and maximizing it

gains from specialization. Countries should adjust its production possibilities frontier to

produce products maximize its comparative advantages while avoiding products produced

from its comparative disadvantages (Yarbrough & Yarbrough, 2007). Like many of its

predecessors that held an autarky economic philosophy, North Korean political leaders

should recognize that this approach to international trade does not provide viable

economic growth, sufficient cash flow from trade activities, and does not raise the welfare

of the countrys populace.


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North Korea has a comparative advantage in unskilled labor that should be used in

product assembly and light manufacturing operations similar to its successful Asian

neighbors. It is possible, therefore, for North Korea to begin catching up with other Asian

countries by promoting an economic plan that takes advantage of foreign trade and foreign

direct investment


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References

Irwin, D. A. (2005). The Welfare Cost of Autarky: Evidence from the Jeffersonian Trade

Embargo, 180709. Review of International Economics, 13(4), 631-645.

Lee, K., Kim, B.-Y., & Lee, I. (2009, May). The Possibility of Economic Reform in North Korea.

Journal of Contemporary Asia, 39(2), 279-294.

Leitz, C. (2002). Export or Die; Foreign trade in the Third Reich.Australian Journal of

Politics and History, 48(1), 52-64.

Nanto, D. K., & Chanlett-Avery, E. (2009). North Korea: Economic leverage and policy, Rpt. 7-

5700. U.S. Congress. Washington, D.C.: Congressional Research Service.

Yarbrough, B. V., & Yarbrough, R. M. (2007). The World Economy: Trade and finance (7th

ed.). United States: Thompson South-Western.

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