The Impact of the Reinforced Sanctions on the North Korean Economy: Focused on the Ripple Effects from Trade Shock

Abstract

This study attempts to examine how reinforced sanctions affected the North Korean economy focusing on the interdependence of industries. North Korea’s trade with China, accounting for more than 90 percent of its total trade, sharply dropped right after the UNSC intensified sanctions. Trade shock affects the domestic economy through a decrease in demand and supply, caused by the reduction of exports and imports, respectively. We estimate the ripple effect from trade shock after the recent sanctions using input-output analysis. According to the estimation results, export shock caused a decrease in value-added by 1.4-1.5 billion USD, which accounts for 8.5-9.0 percent of the North Korean GDP. In addition, import shock was concentrated on the capital goods of final goods, while it rarely affected intermediate imports. For the reinforced sanctions, the dependency of intermediate imports showed an increase in some industries such as agriculture, forestry and fishery and light industry. These results indicate that the economic impact from the recent sanctions could be different from that of the collapse of the former socialist bloc in the early 1990s. In terms of export shock, the sanctions’ negative effect is estimated to be higher. However, the negative effect from import shock is lower than that of the early 1990s, since it is far from reducing the intermediate inputs to the overall industry.