Order Code RL32493
The North Korean Economy:
Overview and Policy Analysis
Updated April 18, 2007
Dick K. Nanto
Specialist in Industry and Trade
Foreign Affairs, Defense, and Trade Division
Emma Chanlett-Avery
Analyst in Asian Affairs
Foreign Affairs, Defense, and Trade Division

---

The North Korean Economy:
Overview and Policy Analysis
Summary
This report provides an overview of the economy of the Democratic People’s
Republic of Korea (DPRK) or North Korea, its external economic relations, attempts
at reform, and U.S. policy options. Along with the United States, North Korea’s
major trading partners — China, Japan, South Korea, and Russia — form the so-
called “six parties,” who are engaged in talks, currently restarted, to resolve issues
raised by the DPRK’s development of nuclear weapons.
The economy of North Korea is of interest to Congress because it provides the
financial and industrial resources for Pyongyang to develop its military, can be used
as leverage in negotiations, constitutes an important “push factor” for potential
refugees seeking to flee the country, creates pressures for the country to trade in
arms and illegal drugs, is a rationale for humanitarian assistance, is tied to
Pyongyang’s nuclear program, and creates instability that affects South Korea and
China. The North Korean threat to sell nuclear weapons material could be driven in
part by Pyongyang’s need to generate export earnings. The dismal economic
conditions also foster forces of discontent that potentially could turn against the Kim
regime — especially if knowledge of the luxurious lifestyle of communist party
leaders becomes better known or as the poor economic performance hurts even
Pyongyang’s elite.
Economic conditions in North Korea currently seem to be improving but have
been dismal for those out of the center of power. Mass starvation — eased only by
international food aid and other humanitarian assistance — has stalked the
countryside. Over the past 15 years, industrial production in North Korea has shrunk
considerably. The country has embarked on a program of economic reforms that
include raising wages, allowing prices to better reflect market values, reducing
dependence on rationing of essential commodities, trimming back centralized control
over factory operations, and opening foreign trade zones for international investment.
North Korea has extensive trading relationships with China and South Korea
and more limited trade with Japan and Russia. Because of U.S. economic sanctions
and lack of normal trade relations status, U.S. imports from North Korea in 2006
were nil, while U.S. exports consisted of $3,000 worth of books and newspapers.
The DPRK has been running an estimated $1.8 billion deficit per year in its
international trade accounts that it funds primarily through receipts of foreign
assistance and foreign investment as well as through various questionable activities,
such as sales of weapons, transporting and producing illegal drugs, and
counterfeiting brand name products and currency.
U.S.-led financial sanctions on North Korea have disrupted that country’s trade.
In the six-party talks, economic assistance (including fuel oil) is a major bargaining
chip. Economic policy options include increasing or easing economic sanctions,
preventing shipments of illicit cargo, normalizing relations with Pyongyang,
negotiating a trade agreement, allowing the DPRK to join international financial
institutions, and removing the country from the terrorism list. This report will be
updated as conditions warrant.

---

Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overviews of the DPRK Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Economic Philosophy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Industrial Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Economic Reforms and Free Trade Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Kaesong Industrial Complex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Sources of Foreign Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Legal Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Illegal or Questionable Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 22
U.S.-DPRK Trade Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
North-South Korean Economic Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
China-DPRK Economic Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Japan-DPRK Economic Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Russia-DPRK Economic Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
U.S. Interests, Strategy, and Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
U.S. Interests, Goals, and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Current U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
The Six-Party Talks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Possible Economic Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Normalizing Diplomatic Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Negotiating a Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Easing U.S. Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Allowing the DPRK to Join International Financial Institutions
(IFIs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Removing the DPRK from the Terrorism List . . . . . . . . . . . . . . . . . . . 46
Fuel and Food Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Legislative Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Brief Chronology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

---

List of Figures
Figure 1. Real Annual Growth in North Korea’s GDP
1986-2006 with 2007 Estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 2. North Korea’s Industrial Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 3. North Korean Exports of Merchandise by Major Country of
Destination, 1994-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 4. North Korean Imports of Merchandise by Major Country Source,
1994-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
List of Tables
Table 1. North Korean Trade by Selected Trading Partner Selected Years,
1994-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 2. North Korea: Total Receipts by Major Source/Donor, 1999-2005 . . . 18
Table 3. North Korea: Net Official Development Assistance by
Major Source/Donor, 1999-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table 4. Economic Aid and Other Official Flows From South Korea to
North Korea, 2000-2004 and Total 1995 to 2004 . . . . . . . . . . . . . . . . . . . . 20
Table 5. U.S. Trade by Commodity With the Democratic People’s
Republic of Korea (North Korea) in 2004-2006 . . . . . . . . . . . . . . . . . . . . . 25
Table 6. U.S. Merchandise Exports, Imports, and Trade Balances with
North Korea, 1990-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table 7. South Korean Merchandise Trade with North Korea, 1990-2006 . . . . 30
Table 8. China’s Merchandise Trade with the DPRK, 1995-2006 . . . . . . . . . . . 32
Table 9. Japan’s Merchandise Trade with the DPRK, 1994-2006 . . . . . . . . . . . 34
Table 10. Russia’s Merchandise Trade with the DPRK, 1994-2006 . . . . . . . . . 36
Table 11. Major Priorities and Bargaining Chips by Country in the
Six-Party Talks with North Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

---

The North Korean Economy:
Background and Policy Analysis
Most Recent Developments
!
March 12, 2007. Treasury announced that through an agreement
with Macau and China, the $25 million held by Banco Delta Asia
would be released to be used by the DPRK for humanitarian
purposes.
!
March 19, 2007. The Six-Party Talks resumed in Beijing, but North
Korea refused to proceed with the talks until the $25 million frozen
in the Banco Delta Asia bank was released.
!
March 14, 2007. Treasury finalized its rule against Banco Delta
Asia in Macau, barring the bank from accessing the U.S. financial
system.
!
February 13, 2007. The countries in the Six-Party Talks announce
an agreement in which North Korea halts its nuclear program in
exchange for energy assistance and diplomatic recognition.
!
October 14, 2006. The UN Security Council adopted Resolution
1718 calling for all UN members to take wide-ranging economic
and diplomatic sanctions against North Korea.
Introduction
The Stalinist state of North Korea (Democratic People’s Republic of Korea or
DPRK) faces a dilemma as its economy stagnates, goods are unequally distributed,
and much of the population undergoes severe privation. The end of the Cold War
negated its value as a surrogate fighter for the former Soviet Union and China and
as a standard bearer for the international proletarian revolution. The country’s
leaders in Pyongyang have very limited options remaining because (1) they perceive
themselves to be a possible target of U.S. military action; (2) they have pushed ahead
with developing nuclear weapons despite warnings not to do so from both friends
and foes, (e.g., China and the United States); and (3) they have committed
themselves to a nuclear free Korean peninsula.
On October 9, 2006, Pyongyang announced that it had completed an
underground nuclear test. Although the test was characterized as a “fizzle” at best,
the focus of the Six-Party Talks has turned from prevention of nuclear weapons to
either rollback of the nuclear program or containment and non-proliferation.

---

CRS-2
In negotiating with the DPRK, the
North Korea at a Glance
United States has five major policy
Land Area: 120,540 sq km, slightly
levers: economic assistance, economic
smaller than Mississippi
s a n c t i o n s , n o n - p r o l i f e r a t i o n
Population: 23.1 million (2006 est.)
enforcement, diplomatic isolation, and
Head of State: Kim Jong-il
the threat of preemptive military action.
Capital: Pyongyang
This report examines the economic side
Life expectancy: 63.6 years
of U.S. leverage with North Korea.
GDP: estimated $40-$68 billion at
The security side is addressed in other
purchasing power parity in 2006
GDP Per Capita: $1,8 0 0 -$2,700 at
CRS reports.1 Here we provide an
PPP in 2006

overview of the North Korean
GDP Composition: agriculture: 30%
economy, survey its economic
industry: 39%, services: 31%
relationships with major trading
Exports: $1.8 billion (2005)
partners, and conclude with a
Export Com m odities: minerals,
discussion of U.S. policy options.
metallurgical products, manufactures
(including armaments), textiles, and
Information on the DPRK’s
fishery products
economy is scanty and suspect. The
Imports: $3.6 billion c.i.f. (2005)
closed nature of the country and the
Import Commodities: petroleum, coking
coal, machinery and equipment; textiles,
lack both of a comprehensive data-
grain
gathering structure using modern
economic concepts and a systematic
Sources: CIA, World Factbook; Global
reporting mechanism make quantitative
Insight
assessments difficult. Still, sufficient
information is available to provide a
sketch of the North Korean economy that has enough details to address different
policy paths.
U.S. interest in the moribund North Korea economy goes beyond the leverage
that economic assistance provides in negotiations over Pyongyang’s nuclear
weapons. The economy is tied to Pyongyang’s push to develop nuclear energy and
bombs; provides the financial and industrial resources for Pyongyang to support its
military; constitutes an important “push factor” for refugees seeking to flee the
country; creates pressures for the country to trade in arms and illegal drugs; when
performing poorly, provides the rationale for international humanitarian assistance;
and creates instability that affects South Korea and China. The North Korean threat
to sell nuclear weapons material seems to be driven in part by its need to generate
export earnings to pay for imports. Dismal economic conditions for many in North
Korea foster forces of discontent that potentially could turn against the ruling regime
of Kim Jong-il — especially if knowledge of the luxurious lifestyle of regime leaders
spreads or if the poor economic performance hurts even Pyongyang’s elite. The
North Korean economy also is a target of U.S. economic sanctions. For the United
States, the confrontation with the DPRK centers on security issues, but economic and
diplomatic levers are more pliable, manageable, and can be applied in discrete
segments.
1 See CRS Report RL33590, North Korea’s Nuclear Weapons Program, and CRS Report
RL33567, Korea-U.S. Relations: Issues for Congress, both by Larry A. Niksch.

---

CRS-3
This report notes that the worst of North Korea’s economic crisis seems to have
passed, but the economy is still heavily dependent on foreign assistance to stave off
starvation among a sizable proportion of its people. About 40% of the population
reportedly still suffers from malnutrition. Currently, Pyongyang’s reforms along
with better weather, some food aid, and increasing trade with South Korea and China
are enabling the country to bridge its shortfall between food production and basic
human needs. However, donor fatigue and competing humanitarian needs in Africa
and elsewhere are depressing current donation levels. UN trade sanctions along with
U.S. financial sanctions appear to have had some effect, judging by the complaints
coming out of Pyongyang. U.S. trade sanctions, however, have little impact because
the United States already has virtually no trade with the DPRK and the country can
turn to other nations for needed imports. The Six-Party Agreement of February 13,
2007, includes an economic incentive of heavy fuel oil as well as the prospect of the
normalization of diplomatic relations between the DPRK and the United States and
Japan in exchange for North Korea’s freezing and allowing inspections of the
activity at its Yongbyon nuclear reactor.
Overviews of the DPRK Economy
The North Korean economy is one of the world’s most isolated and bleak.2 It
was completely bypassed by the Asian “economic miracles” of the past three decades
that brought modern economic growth and industrialization to South Korea, Taiwan,
Singapore, and Hong Kong, as well as rapid growth and trade liberalization to China,
Thailand, Malaysia and other Asian nations. The “Stalinist” North Korean economy
can be characterized by state ownership of means of production, centralized
economic planning and command, and an emphasis on military development. The
economic system is designed to be self-reliant and closed. The irony of the situation
is that the longer the economy tries to remain self-sufficient, the poorer its
performance, and the more dependent the country becomes on the outside world just
to survive.
During the 1990s, major portions of the North Korean population survived
primarily through transfers of food and other economic assistance from abroad. The
worst of the food crisis has now passed, but the country is dependent on staples from
China, South Korea, and, when allowed, from the UN World Food Program (WFP).
During the 1990s, the inefficiencies of North Korea’s centrally planned
economy, especially its promotion of state-owned heavy industries, along with high
military spending — about 15-25% of GDP — joined with drought and floods to
push the economy into crisis. In addition, the collapse of the Soviet bloc meant the
loss of Russian aid, export markets, and cheap oil. Trade with the former Soviet
Union dropped from as much as $3 billion $58 million in 1999 and has recovered to
only $230 million (mostly petroleum) by 2005.3 This added to disastrous domestic
2 For an in-depth study of the North Korean economy, see Marcus C. Noland, Avoiding the
Apocalypse: The Future of the Two Koreas, Institute for International Economics, 2000.
3 Data from Global Insight. Subscription database.

---

CRS-4
economic conditions in North Korea.4 Food has been so scarce that North Korean
youth are shorter than those in other East Asian nations.5 Since 1998, the military
reportedly has had to lower its minimum height requirement in order to garner
sufficient new recruits. Life expectancy has been contracting. With the help of the
WFP, which had been feeding more than a quarter of North Korea’s 22 million
people, chronic malnourishment among children reportedly fell from 62% in 1998
to about 37% in 2004. About one-third of mothers are considered to be both
malnourished and anemic.6 In January 2006, Pyongyang ordered the WFP to stop
food deliveries to the DPRK, but limited food assistance (about 75,000 tons
annually) was resumed after an agreement in May 2006.7 Pyongyang recently has
embarked on a series of reforms that may ease the economic pressures over the long
term.
The DPRK’s gross national product in 2006 in purchasing power parity prices
(PPP) — prices adjusted to international levels — has been estimated at $40 billion
(CIA estimate) to $68 billion (Global Insight estimate). This amounts to national
income of about $1,800 to $2,700 per capita in PPP values or roughly in the range
of that of Zimbabwe, Uzbekistan, Bangladesh, or the Sudan. This is considerably
lower than that of China ($6,572), Indonesia ($3,842), or Japan ($30,821). It is also
dramatically lower than South Korea’s $21,868 in PPP values or $16,200 at market
prices.8 According to Global Insight, in market prices, North Korea’s GDP is an
estimated $12.2 billion. A remarkable fact is that in the post-Korean War and into
the mid-1970s, living standards were higher in North Korea than in either South
Korea or China. Now, North Korea is far behind its rapidly growing neighbors.
As shown in Figure 1, growth in estimated real gross domestic product (GDP)
in the DPRK was dropped into the negative for most of the 1990s before beginning
to recover in 1999. In 2004 to 2006, growth has been continuing at about 2%, up
slightly from earlier years. In essence, the economy is expanding moderately but
still is below its 1989 level. In 1989, real per capita gross domestic product on a
purchasing power parity basis (using 1996 prices) was estimated at $3,276. It
dropped to $2,055 in 1998 but had recovered moderately to an estimated $2,420 by
2006.9 Nominal per capita GDP (valued at current exchange rates and not adjusted
for inflation), similarly dropped from $1,097 in 1989 to $706 in 1999 and recovered
somewhat to $909 by 2003, but following the devaluation of the North Korean won
in conjunction with economic reforms, fell to a dollar value of $535 in 2006.
4 Global Insight. Korea, North: Economic Trends: Economic Growth: Background. March
4, 2003.
5 Chao, Julie. Economic Devastation Visible in Pyongyang. Korea Is like a Land Time
Forgot, and Crisis with U.S. Isn’t Helping. The Austin American Statesman, May 3, 2003.
P. A17.
6 Watts, Jonathan. Where Are You, Beloved General? In a Land Where Paranoia,
Propaganda, and Poverty Are the Norm, an Albino Raccoon Reassures North Koreans That
Good Times Are Ahead. Mother Jones, Vol. 28, No. 3, May 1, 2003. P. 52.
7 UN World Food Programme. WFP Set to Resume Operations in North Korea, Press
Release, May 10, 2006.
8 PPI figures are from the World Bank. World Development Indicators.
9 Global Insight. North Korea, Detailed Forecast, annual data. Updated October 2006.

---

CRS-5
Agricultural production appears to be back around the 1992 level primarily because
of better weather and imports of fertilizer from South Korea.
Figure 1. Real Annual Growth in North Korea’s GDP
1986-2006 with 2007 Estimate
Percent
8
6.2
6
3.7
4
3 3.3 2.9 2.4
2.2
2.4
1.8
2.1
2
1.3
1.6
1.2
0
-1.1
-2
-2.1
-4
-3.7-3.5
-3.6
-4.2
-4.1
-6
-6
-6.3
-8
1986
88
90
92
94
96
98
2000
2
4
5
6
7
Year
Sources: Bank of Korea and Global Insight
In this land of scarcity, consumer necessities have been rationed and used to
reward party loyalists. Under Pyongyang’s economic reforms, this system appears
to be phasing out, but in the fall of 2005, North Korea backtracked on some of its
economic reforms by forbidding private sales of grains and reinstituting a centralized
food rationing system. Pyongyang also reportedly closed its food markets but then
opened consolidated markets that carried food and other items. According to South
Korean observers, North Korea classifies its citizens into three ranks and fifty-one
categories based on their ideological orientation. The categories are then used to
allocate rations for daily necessities, jobs, and housing.10 The elite in North Korean
society (party cadres who are leaders in the military and bureaucracy) have enjoyed
privileges far above the reach of the average citizen. While starvation haunts the
provinces, many of the privileged class live in Pyongyang (where provincial North
Koreans cannot enter without special permission); some drive foreign cars, acquire
imported home appliances, reside in apartments on a lower floor (so they do not have
to climb too many stairs when the electricity is out), and buy imported food,
medicines, and toiletries at special hard currency stores.11 The elite have a strong
vested interest in maintaining the current economic system, despite its problems.
10 South Korea. Ministry of Unification. North Korea Today, August 14, 2001 (Internet
edition).
11 UN World Food Programme. World Hunger — Korea (DPR). Available at
[http://www.wfp.org/country_brief/indexcountry.asp?country=408].

---

CRS-6
Their incomes originate from the treasury, from foreign investors (mostly South
Korean), remittances from ethnic Koreans in Japan (although these have been
curtailed), and the country’s shadowy trade in everything from missile technology
to fake banknotes and narcotics.12
Economic Philosophy
The Pyongyang regime has pursued a policy of self-sufficiency and isolation
from the world economy that they call juche or self-reliance. Juche goes beyond
economics as it has been used since the 1950s to perpetuate power by the central
government and to build an aura of the supernatural around their supreme leaders
Kim — both father and son.13 Although the regime does not emphasize the
connection, the current system of dynastic succession with a paramount father figure
also harkens back to Confucianism and the powerful dynastic tradition that united
the Korean peninsula for hundreds of years.
The economic practice of juche has minimized international trade relations,
discouraged foreign direct investment, and fostered what it considers to be core
industries — mostly heavy manufacturing. While promoting such heavy industry,
for most of the post-Korean War period, Pyongyang has emphasized the parallel
development of military strength.
Current head of state, Kim Jong-il (often referred to as “Dear Leader”), has
given highest priority to the military. This places the army ahead of the working
class for the first time in the history of North Korea’s so-called revolutionary
movement.14 Under Kim Il-sung (Kim Jong-il’s father), the juche ideology placed
equal emphasis on political independence, self-defense, and economic self-support
capabilities. Kim Jong-il, however, insists that North Korea can be a “country strong
in ideology and economy” only when its military is strong.15 The country, therefore,
has been developing its industries within the context of a military-industrial complex
with strong links between heavy industry and munitions production. Some of North
Korea’s munitions industries (manufacturing dual use products) are virtually
indistinguishable from those supplying civilians.16
In 2005, Pyongyang’s defense budget was an estimated $1.9 billion to maintain
its 1.1 million member military. South Korea estimated the North’s military
expenditures at $5 billion in 2003. In 2006, North Korea stated that the defense
12 Desperate Straits, Special Report (1). The Economist, May 3, 2003 (U.S. Edition).
13 See, for example: Natural Wonders Prove Kim Jong-Il’s Divinity: North Korean Media,
Agence France Presse. May 3, 2003.
14 British Broadcasting Corporation. N. Korea: Paper Supports Leader Kim Jong-il’s
Military-first Ideology, April 26, 2003. Reported by BBC from KNCA News Agency
(Pyongyang).
15 Toyama, Shigeki. Expert on Kim Chong-il’s “Military-First Politics,” South-North Issues,
Tokyo Gunji Kenkyu (in Japanese, translated by FBIS), August 1, 2002. P. 108-117.
16 Nam, Woon-Suk. Guidelines of Economic Policies. KOTRA, January 9, 2001.

---

CRS-7
budget was 15.9% of its total annual budget, but others had put the figure at 27.2%
in 2003.17
The heavy weight of the military in Pyongyang’s decision making may help
explain what to outsiders seem to be inexplicable actions by the North Korean
government. For example, almost immediately after negotiators had issued the
September 19, 2005, Six-party Statement in which North Korea ostensibly
committed itself to abandoning all nuclear weapons and existing nuclear programs,
Pyongyang began backtracking and within two months announced a boycott of future
Six-Party Talks.18 It also may help explain North Korea’s carrying out its first
nuclear test on October 9, 2006, despite being warned not to do so by the United
States, China, and other nations.
When juche is combined with central planning, a command economy, and
government ownership of the means of production, economic decisions that in a
market economy would be made by private business and farmers have to go through
a few elite in Pyongyang. These decision makers may or may not understand
advances in agronomy or manufacturing and tend to be motivated by non-economic
factors, such as maintaining political power or avoiding blame for initiatives gone
awry. Farming methods based partly on crop rotation or new varieties of rice, for
example, may be viewed as too risky.19 Foreign investment also is hindered partly
because the regime abhors being “exploited” by capitalists who seek to make profits
on their business ventures in North Korea and partly because of their deep-seated
mistrust of Westerners, Japanese, and South Koreans.
As with other isolationist economies in the contemporary world of globalization
and interlinked societies, North Korea has been plagued with the negative effects of
its attempts at self sufficiency: technological obsolescence, uncompetitive exports,
economic privation, and lack of foreign exchange. These difficulties, together with
advice from China and the demise of the Stalinist economy in Russia, have
compelled the Pyongyang regime to introduce some economic reforms, or what they
refer to as “adjustments.” To a large extent, they are adopting the Chinese reform
sequence with economic reforms preceding political reforms while eschewing the
Russian model of political reform preceding and concurrent with economic reforms.
Industrial Sectors
North Korea’s industrial sectors are shifting rapidly. At the end of World War
II, the DPRK represented the industrialized part of the Korean peninsula. Under
Japanese colonialism, heavy industry, water power, and manufacturing were
concentrated in the North, while agriculture flourished in the less mountainous
17 The International Institute for Strategic Studies. The Military Balance, 2006. London,
Routledge, 2006. P. 276.
18 Asia: The deal that wasn’t; North Korea. The Economist. London: September 24, 2005.
p. 81.
19 Current experiments in agriculture are directed from Pyongyang with seven major tasks
that include replacing chemical fertilizers with organic and microbial ones. See Yonhap
News. N. Korea Eyes China as a Model for Development. May 11, 2004.

---

CRS-8
South. Even in 1990, 49% of the North Korean economy was in mining,
manufacturing, and construction, while 23% was in services (including government
and utilities) and 27% in agriculture. In recent years, however, the DPRK’s non-
military industries have almost collapsed. By 1997, mining, manufacturing, and
construction had dropped from 49% to 32% of the economy but in 2003 had risen
somewhat to 36%. In 2003, services had risen to 37% of the economy, while
agriculture has remained fairly constant at 27%. (See Figure 2.) Some of the most
advanced industries in North Korea are associated with its military.
Figure 2. North Korea’s Industrial Structure
Percent of Total Economy
100%
80%
Services/Utilities
60%
Manufacturing/Mining/Construction
40%
20%
Agriculture, Forestry, & Fisheries
0%
90 91 92 93 94 95 96 97 98 992000 1
2
3
4
Year
Source: The Bank of Korea.
The drop in the share of manufacturing in GDP has come about largely because
of the rapid decline in production from factories, not because of large absolute
increases in services or agricultural production. Reports indicate that factories have
been running at about 30% of their capacity. The economy lacks food for workers,
raw materials, energy, and foreign currency to buy new equipment and imported
inputs into the manufacturing process.20 Much industrial capital stock is nearly
beyond repair as a result of years of underinvestment and shortages of spare parts.
Recently, the government has emphasized earning hard currency, developing
information technology, addressing power shortages, and attracting foreign aid, but
it appears unwilling to do so in any way that jeopardizes its control. It has initiated
some market-oriented reforms and allowed some liberalization that might bring new
capital and production methods into its factories, but it is a long way from the
reforms that have occurred in other socialist countries.
20 Former North Korean Professor Interviewed on Pyongyang’s Economic Reform. Choson
Ilbo, April 14, 2003. Translated and reported by BBC Worldwide Monitoring, April 18,
2003.

---

CRS-9

The agricultural sector also is in dire straits. The economy depends heavily on
collective farms that have been devastated by drought or floods, lack of fertilizers
and other inputs, antiquated farming methods, and a lack of incentives for private
production. A report in 2003 from North Korea indicated that the situation along the
border with China had deteriorated to the point that rates of starvation, disease, and
even suicides were reaching a crisis point.21 The situation arguably would be worse
without international food and other humanitarian aid.
Economic Reforms and Free Trade Zones
In July 2002, Pyongyang announced a series of economic reforms that some
surmise may mark the beginning of the end of the Stalinist controls over the
economy and the onset of more use of the market mechanism to make economic
decisions, particularly production and consumer purchases. Although the
government has dubbed the reforms an “economic adjustment policy,”22 the actions
appear to be a desperate attempt to revive the moribund economy, similar to what
was done in China. The reforms also dovetail with North Korea’s “military first”
policy. As Kim Jong-il has given first priority to the military, the rest of the
population has suffered.23 This, in turn, has raised pressures on Pyongyang to reform
its economic system.
The adjustments featured an end to the rationing system for daily commodities
(except for food), a huge increase in prices of essentials and in wages, a major
devaluation of the currency (official exchange rate), abolishment of the foreign
exchange coupon system, increased autonomy of enterprises, authorization of the
establishment of markets and other trading centers, and a limited opening of the
economy to foreign investment. Prices still remain under centralized control but at
levels closer to those existing in peasant (free) markets. North Korea has not
abandoned the socialist planned economy, but it has been compelled to reform
certain aspects of it.
Under the reforms, overall prices were increased by 10 to 20 times.
Government prices for many essential items, however, rose by much more. The
price for rice rose by 550 times, for corn 471 times, for diesel oil 38 times, and for
electricity 60 times. Wages also were raised but not enough to keep pace with
skyrocketing consumer prices. Wages rose by 18 times for laborers and 20 times for
managers.24 Even though not all workers received the promised wage increases, the
price and wage reforms caused households to face rampant consumer inflation, and
many people ended up worse off financially than before the reforms.
21 Gifford, Rob. North Korea (audio report), NPR Morning Edition, April 30, 2003.
22 Hong, Ihk-pyo. A Shift Toward Capitalism? Recent Economic Reforms in North Korea.
East Asia Review, vol. 14, Winter 2002. Pp. 93-106.
23 In January 2007, the communist party’s central committee reportedly asked families to
“voluntarily” offer food to the army, since the food shortage in the people’s army was
severe. Yang, Jung A. Citizens Exploited as the Nation Cannot Produce its Own Income.
The Daily NK (Internet edition), January 24, 2007.
24 Hong, Ihk-pyo, A Shift Toward Capitalism?, East Asia Review, Winter 2002. Pp. 96.

---

CRS-10
In North Korean factories, reforms include greater control over prices,
procurement, wages, and some incentives to increase profits in order to distribute
them based on individual performance. The regime also is looking to implement
reforms in agriculture similar to those implemented in China (along the lines of the
rural household contract system). In the mid-1990s, North Korea’s agricultural work
squads had already been reduced in size. Now they are moving toward family
oriented operations with farmers allowed to retain more of any production exceeding
official targets.
Although small farmers’ markets have long existed in North Korea, Pyongyang
did not legalize such farmers’ markets until June 2003. This followed the formal
recognition of commercial transactions between individuals and the 1998 revision
to the constitution that allowed individuals to keep profits earned through legitimate
economic activities.25 Now free markets and shopping centers that use currency, not
ration coupons, are spreading. The Pyongyang Central Market, for example, became
so crowded that a new, three-story supermarket had to be built. Pyongyang’s Tongil
market with its lines of covered stalls stocked with items such as fruit, watches,
foreign liquor, clothes, Chinese-made television sets, and beer from Singapore also
is bustling with sellers and consumers reminiscent of those in other Asian
countries.26 Visitors to Pyongyang in late 2006 indicated that the market was
thriving with all types of products and shoppers driving European cars.27
Foreign Investment
North Korean economic reforms also include opening certain areas to foreign
investment. Under the Joint-Operation Act of 1984 to 1994, there were 148 cases
of foreign investment worth about $200 million into North Korea. Of these 148
cases, 131 were from pro-North Korean residents of Japan. In 1991, Pyongyang
opened the Rajin-Sonbong free trade zone and established the Foreigner Investment
Act. To 1997, some 80 investments totaled $1.4 million. Other areas receiving
foreign investment include Nampo, Pyongyang, Kosung-gun, Shimpo, Wonsan, and
Mt. Kumkang. Foreign companies in North Korea include 50 South Korean
companies (e.g., Hyundai, daewoo, Taechang, LG, Haeju, and G-Hanshin), DHL,
ING Bearing Bank; Japan’s Hohwa, Saga, and New Future Ltd. companies;
Taiwan’s JIAGE Ltd., and the China Shimyang National Machinery Facility Sales
Agency Corporation.28 The U.N. Development Programme is promoting the Tumen
River Valley Development Project which aims to develop business based on transit
25 Jeong, Chang-hyun. Capitalist Experiments Seen Expanding into DPRK. Joong Ang Ilbo,
October 19, 2003. Translated in CanKor #160 by Cananda-DPR Korea e-clipping Service,
April 13, 2004.
26 Lintner, Bertil. North Korea, Shop Till You Drop, Far Eastern Economic Review, May
13, 2004. P. 14-19.
27 Pritchard, Charles L. Siegfried S. Hecker, and Robert Carlin. News Conference: Update
from Pyongyang, sponsored by the Korea Economic Institute, held at the National Press
Club, Washington, DC, November 15, 2006.
28 KOTRA, North Korea, Status of Induced Foreign Capital.

---

CRS-11
transportation, tourism, and commissioned processing trade.29 Mt. Kumkang has
been developed with the cooperation of South Korea’s Hyundai corporation into a
tourist destination for South Koreans and a venue for reunions of families separated
by the DMZ.
Since 2000, the DPRK has attempted to emulate China’s highly successful free
trade zones (FTZ) by establishing the Sinuiju Special Administrative Region (SAR)
on the northwestern border with China and Kaesong (Gaesong) Industrial Complex
along the border with South Korea. Since being established in 2002, the
development of the Sinuiju SAR has been stymied because of the arrest by Beijing
of Chinese businessman Yang Bin, a Chinese-Dutch entrepreneur who was named
as its governor, on charges of illegal land use, bribery and fraud. After Kim Jong-il’s
visit to China in 2006, Sinuiju appears to be receiving new attention. Foreign
currency management groups reportedly are moving in, and ordinary citizens are
being replaced by residents of Pyongyang and other areas.30
Kaesong Industrial Complex
Currently, the most significant effort at creating free-trade zones is the Kaesong
Industrial Complex (KIC). This joint effort between the North and South is
developing rapidly, despite tensions over North Korea’s testing of ballistic missiles
and a nuclear weapon. The KIC is managed by South Korea’s Hyundai Asan and
Korea Land Corporation. Located just over the border 43 miles north of Seoul on
the route to Pyongyang, this 810-acre complex aims to attract South Korean
companies, particularly small and medium sized enterprises, seeking lower labor and
other costs for their manufactured products and who may not be able to establish
subsidiaries in China or other countries. In January 2006, 15 companies had begun
operations in Kaesong. By January 2007, they were employing 8,746 North Korean
personnel (another 2,206 North Koreans were working in construction in the
complex). To be completed in three stages, the first stage (2002-2007) had 3.3
million square meters of a total of 66 million square meters being constructed or
under construction in 2006. Hyundai Asan and the Korea Land Corporation plan to
eventually attract 300 businesses in the first stage, 700 in the second, and 1,000
businesses in the third stage with an estimated total of 300,000 workers. Of the $374
million initial cost for the first stage, $223 million was to be provided by the South
Korean government. In December 2006, the Korea Electric Power Corporation
connected North and South Korea by a 100,000 kilowatt power-transmission line for
use by the companies in the KIC.
The 15 companies operating in Kaesong in 2006 and their products include
Living Art (kitchenware), Shinwon (apparel), SJ Tech (semiconductor component
containers), Samduk Trading (footwear), Hosan Ace (fan coils), Magic Micro (lamp
assemblies for LCD monitors), Daewha Fuel Pump (automobile parts), Taesung
Industrial (cosmetics containers), Bucheon Industrial (wire harness), Munchang Co.
(apparel), Romanson (watches, jewelry), JY Solutec (automobile components and
molds), TS Precision Machinery (semiconductor mold components), JCCOM
29 K. Park. A Report on Visit to Rajin-Seonbong Region, January 4, 2001. KOTRA,
30 Institute For Far Eastern Studies. Interest Revived in the Sinuiju Special Administrative
Region. Reported by Nautilus Institute, Policy Forum Online 06-25A, March 30, 2006.

---

CRS-12
(communication components), and Yongin Electronics (transformers, coils).31 In
2006, the KIC produced some $7.5 million worth of goods each month.32
Kaesong developed partly from South Korea’s sunshine policy of economic
engagement with the North. The KIC serves both geopolitical and economic
purposes. Geopolitically, it provides a channel for rapproachment between North
and South Korea, a bridge for communication, a method of defusing tensions, and
a way to expose North Koreans to outside ideas and ways of doing business.
Economically, the KIC provides small- and medium-sized South Korean firms with
a low-cost supply of labor for manufacturing products, provides jobs for North
Korean workers, and provides needed hard currency for Pyongyang. Even after the
North Korean nuclear test in 2006, KIC operations continued.
A controversial issue has arisen with respect to the KIC and the proposed South
Korea-U.S. Free-trade Agreement. South Korea has requested that products
exported from the complex be considered to have originated in South Korea in order
to qualify for duty free status under the proposed FTA. Such a provision has been
included in other South Korean FTAs. The U.S. negotiating position, however, has
been that only products made in South Korea would be included.33 At a House
International Relations Committee hearing on July 20, 2006, Assistant U.S. Trade
Representative Karan Bhatia indicated that the proposed FTA would not cover goods
made in a free-trade zone in North Korea.34
Other issues raised by the K.C. have been the conditions for North Korean
workers, whether they are being exploited,35 as well as the hard currency funds the
industrial complex provides for the ruling regime in Pyongyang. South Korean
officials, as well as other analysts, point out that average wages and working
conditions at Kaesong are far better than those in the rest of North Korea. The
monthly minimum wage is $50 ($57.50 including the cost of social insurance).
General workers receive $50, team leaders receive $52-$55, and heads of companies
receive $75 per month. After the government, takes its share of the wages, the
workers receive about $37 per month. Workers also receive overtime pay.36
31 Republic of Korea. Ministry of Unification. Gaeseong Industrial Complex Project —
Status and Tasks, June 2005.
32 South Korea to Continue “Utmost Efforts” for Inter-Korean complex — Minister. Yonhap
News Agency. Reported by BBC Monitoring Asia Pacific. London, December 8, 2006.
33 For details, see CRS Report RL33435, The Proposed South Korea-U.S. Free Trade
Agreement (KORUS FTA), by William H. Cooper and Mark E. Manyin.
34 Hyde Warns USTR to Keep Kaesong, Visas out of Korea FTA. Inside US Trade, July 21,
2006.
35 Rights Body Criticizes South Korea Over Refugee Protection, Inter-Korean Complex.
Yonhap News Agency, Seoul. Reported by BBC Monitoring Asia Pacific. London, January
12, 2007.
36 South Korea Considers Expanding Joint Industrial Complex in North. Yonhap News
Agency, Seoul. Reported by BBC Monitoring Asia Pacific. London, July 26, 2006. Ministry
of Unification (South Korea). The Gaesong Industrial Complex. Status of North Korean
Workers. November 14, 2006. On Internet at [http://www.unikorea.go.kr/english/EUP/

---

CRS-13
The North Korean government derives hard currency from several sources in
the KIC project, including leasing fees and its cut from the wages of North Korean
workers. The wages are first paid in hard currency to a North Korean government
agency that takes a certain percentage before paying the North Korean workers in
won. If the government collects about $20 per month (in social insurance taxes plus
its cut of wages) for each of the 10,000 workers now at Kaesong, its monthly take
from wages would amount to approximately $200,000 per month or $2,440,000 over
a year. One estimate is that Pyongyang has earned a total of about $20 million from
the Kaesong Industrial Complex.37
International Trade
Despite North Korea’s isolation and emphasis on juche, it does trade with other
countries. The foreign economic sector plays an important role for Pyongyang in
that it allows the country to import food, technology, and other merchandise that it
is unable to produce in sufficient quantities at home. Since North Korea does not
export enough to pay for its imports, it generates a deficit in reported merchandise
trade that must be financed by other means. Pyongyang has to find sources of
foreign exchange — other than from its overtly traded exports — to pay for the
imports. Experts surmise that North Korea’s involvement in illicit or questionable
economic activities, particularly illegal drug trade and sales of military equipment,
may be an attempt to generate the foreign exchange necessary to fill this trade gap.38
Detailed data on the country’s external economic relations suffer from
reliability problems similar to those associated with the domestic economy. The
foreign economic data on actual commercial transactions, however, tend to be the
most accurate since they also are reported by trading partner countries and are
compiled by the International Monetary Fund and United Nations. Individual
countries, for example, report on their imports from and exports to North Korea.
These data, however, differ from North Korea’s actual annual numbers because of
the time lag in shipping (a product shipped from a country in late December of a year
might not be recorded as arriving in North Korea until the following year), costs of
freight and insurance (North Korean import data may be on a c.i.f. basis that includes
insurance and freight charges that are not included in a country’s export data), and
differences in data gathering methods, coverage, and reporting. Detailed and reliable
data on trade in military equipment and illegal drugs are notoriously difficult to
obtain and to verify.
South Korea also compiles statistics on trade with North Korea that differ from
its data reported to the United Nations. South Korea considers trade with the North
36 (...continued)
EUP0201R.jsp].
37 CRS Report RL33435, The Proposed South Korea-U.S. Free Trade Agreement (KORUS
FTA), by William H. Cooper and Mark E. Manyin.
38 Eberstadt, Nicholas Statement. Hearing on Drugs, Counterfeiting, and Weapons
Proliferation: The North Korean Connection, Subcommittee on Financial Management, the
Budget, and International Security, U.S. Senate Committee on Governmental Affairs, May
20, 2003.

---

CRS-14
as inter-Korean trade, not foreign trade. The trade figures that South Korea report
to the IMF for its commercial transactions with the North are considerably lower
than the figures that it reports as inter-Korean trade [available from the Korean
Trade-Investment Agency (KOTRA)]. The South Korean data also include more
detail on non-transactional trade (mostly foreign aid) with North Korea. IMF data
also differ somewhat from those reported by data vending companies (such as World
Trade Atlas). This report uses a combination of trade totals from the IMF, partner
country data from the World Trade Atlas, and intra-Korean trade from South Korea’s
KOTRA.
Table 1. North Korean Trade by Selected Trading Partner
Selected Years, 1994-2006
($ in millions)
North Korean Exports to:
1994
1998
1999
2000
2001
2002
2003
2004
2005
2006
World
1,039
965
892
995
1,047
1,274
1,206
1,462
1,760
n.a.
China
181
51
42
37
167
271
395 582
497 468
Japan
328
219
203
257
226
234
174 164
132
76
S. Korea
176
92
122
152
176
272
289
258
340
520
Russia
44
8
7
8
15
10
3
5
7
20
Germany
57
24
20
20
19
25
17
93
15
17
North Korean Imports from:
1994
1998
1999
2000
2001
2002
2003
2004
2005
2006
World
1,286
1,300
1,436
2,376
3,520
2,436 2,698
3,258
3,556
n.a.
China
467
357
329
451
571
467
628 794
1,085
1,232
Japan
171
175
148
207
1,065
133
91 89
63
44
S. Korea
18
130
212
273
227
370
435
439
715
830
Russia
70
56
48
36
56
47
112 205
198
191
Germany
59
24
32
53
82
141
71 67
62
59
Balance of
-247
-335
-544
-1,38
-2,47
-1,16
-1,49
-1,79
-1,796
n.a.
Trade
1
3
2
2
6
Source: S. Korean data from S. Korea, Unification Ministry. World trade data from
International Monetary Fund, Direction of Trade Statistics. Country data from World Trade
Atlas. World sum is the estimated total North Korean trade plus trade with South Korea.
Note: Global Insight estimates North Korea’s balance of trade to be -$1.581 billion in 2004,
-$1.303 billion in 2005, and -$1.414 billion in 2006, but these figures do not include trade
with South Korea. n.a. = not yet available.
The DPRK’s policy of juche, its suspicion of foreign countries, and the collapse
of its industrial production, has resulted in a minimal level of commercial relations
with other nations in the world. As shown in Table 1, in 2002 it exported $1,274
million in merchandise exports (up from $1,047 million in 2001) while importing

---

CRS-15
$2,436 million (down from 2001 but up slightly from recent years) for a merchandise
trade deficit of $1,162 million. Total exports in 2003 appear to have declined
slightly. After exports dropped in 1998, they have recovered considerably in recent
years, although they are still quite a bit under their 1990 levels.39
North Korea’s major trading partners have been China, Japan, South Korea,
Russia, Germany, Brazil, India, Thailand, Singapore, and Hong Kong. As shown in
Figure 3, North Korea’s major import sources have been China, Japan, South Korea,
Russia, and Germany. Thailand and India also are becoming major suppliers. Major
imports by North Korea include machinery, minerals, plant products, and chemical
products.40 In particular, imports of energy materials and foods reflect Pyongyang’s
attempts to remedy these fundamental shortages.
Despite current tensions over Pyongyang’s nuclear program, imports appear to
be growing and may have exceeded their peak in 2001. Fuel imports from China,
and food imports from various countries account for most of the increases. Trade
with Japan has been decreasing, while trade with South Korea has increased
considerably.
Figure 3. North Korean Exports of Merchandise by Major Country
of Destination, 1994-2005
$million
2000
1500
Other
1000
Germany
South
Korea
Japan
500
China
0
1994
95
96
97
98
99
2000
1
2
3
4
5
Year
Source: IMF, Direction of Trade Statistics, (South) Korean Trade and Investment Agency (KOTRA), and World
Trade Atlas.

Major export markets for the DPRK have been Japan and China with South
Korea developing as a major market following the easing of relations. (See Figure
39 (South) Korea Trade-Investment Agency (KOTRA).
40 (South) Korea Trade-Investment Agency (KOTRA).

---

CRS-16
4.) In Europe, Germany has been North Korea’s major trading partner, and in Latin
America, Brazil is developing as a market for North Korea’s exports. In 2003,
exports to Japan declined — due in part to friction over the DPRK’s admitted
kidnappings of Japanese citizens. North Korea’s major exports include animal
products, textiles, machinery, electronic products, and base metals.
Figure 4. North Korean Imports of Merchandise by Major Country
Source, 1994-2005
$millions
4
3
Other
2
Russia
South
Korea
Japan
1
China
0
1994
95
96
97
98
99
2000
1
2
3
4
5
Year
Source: Data from IMF, Direction of Trade Statistics, World Trade Atlas, & (South) Korean Trade-Investment Agency
(KOTRA).
A recent remarkable development has been North Korea’s increase in exports
of primary products (such as fish, shellfish and agro-forest products) as well as
mineral products (such as base metallic minerals). Pyongyang reportedly has
imported aquaculture technology to increase production of cultivated fish and
agricultural equipment to increase output of grains and livestock. It also has
imported equipment for its coal and mineral mines. Some of this increased output
is being sold abroad to generate foreign exchange to fund imports.41
Meanwhile, traditional exports of textiles and electrical appliances have been
declining. This reflects North Korea’s unstable power supply, lack of raw materials
and components imported from abroad, and the need to ship finished goods to China
or another third country for final inspection. This diminishing ability of North Korea
to provide a reliable manufacturing platform for the least complicated assembly
operations does not bode well for the country’s future ability to generate the exports
necessary to balance its trade accounts.
41 KOTRA. North Korea’s Foreign Trade in 2001. Available at [http://crm.kotra.or.kr].

---

CRS-17
Other Sources of Foreign Exchange
North Korea’s annual merchandise trade deficit of $1 billion or more implies
that Pyongyang must be generating that amount in foreign exchange through some
means — either legal or illegal. Legal means include borrowing, foreign
investments, foreign aid, remittances from overseas North Korean workers, selling
military equipment not reflected in trade data, and by selling services abroad. Illegal
methods include the counterfeiting of hard currency, illegal sales of military
equipment or technology, sales of illegal drugs, or by shipping illegal cargo between
third countries. The country also can dip into their foreign exchange reserves.
Legal Sources of Funds
North Korea is able to borrow on international capital markets. As of the fourth
quarter of 2006, the country had loans from foreign located banks of $197 million
(up from $121 million at the end of 2005, $81 million in 2004, and $190 million in
2003). The figure for 2006 is a relatively small amount, only $8.50 per capita. If
loans from foreign controlled banks are added to those from foreign located banks,
the total comes to $306 million for the fourth quarter of 2006. Total consolidated
liabilities to foreign banks (including debt securities held by foreign banks) declined
to $133 million by the fourth quarter of 2005 from $289 million the year previous.
By June 2006, however, the total had risen to $351 million.42
International bond issues are not a major source of funds for North Korea. In
May 2003, the country issued ten-year bonds — the first since 1950 — but since its
sovereign securities are not rated by major Western credit rating agencies, the issue
has generated little interest on international financial markets and is aimed at
domestic investors. Pyongyang claims that a million people had signed up to receive
the bonds, but many speculate that the deductions from the salaries of North Korean
purchasers in amounts equivalent to four months’ wages to buy the bonds is not
voluntary.43
Although North Korea is not a major recipient of foreign direct investment
(FDI), in 1997 FDI inflows totaled $307.4 million. Inflows declined to $30.7 million
in 1998, -$14.9 million in 1999, $5 million in 2000, -$4 million in 2001, -$15
million in 2002, -$158 million in 2003, $197 million in 2005, and $113 million in
2005. In 2005, the stock of FDI in North Korea totaled $1,495 million.44 North
Korea’s free trade zones, however, are attracting more foreign direct investment, but
so far the actual inflows appear to have been fairly modest. South Korea’s Hyundai
Corporation, however, secretly paid North Korea nearly $500 million, partly in
money borrowed from the South Korean government just a week before the two
nations held a historic summit in June 2000. This was part of an estimated billion
42 Data are from: Joint BIS-IMF-OECD-WB External Debt Hub at
[http://devdata.worldbank.org/sdmx/jedh/jedh_home.html].
43 Gittings, Danny. Kim Can’t Kill the Free Market. The Wall Street Journal (Brussels),
May 30, 2003. P. A11.
44 United Nations Conference on Trade and Development. World Investment Report, 2006.
New York, United Nations, Foreign Direct Investment Database.

---

CRS-18
dollars or more Hyundai was to pay for exclusive rights to engage in seven major
economic projects there.45
A major source of funding for imports into the DPRK has been foreign aid or
direct government transfers. Both developmental and humanitarian aid and past
assistance under KEDO (Korean Peninsula Energy Development Organization,
created under the 1994 Agreed Framework, but construction was terminated in 2003)
to build two light water nuclear reactors and provide heavy fuel oil have enabled
imports into North Korea without financing from Pyongyang.
Table 2. North Korea: Total Receipts by Major Source/Donor,
1999-2005
($ in millions)
Total Receipts Net
1999
2000
2001
2002
2003
2004
2005
U.S. 146.3
1.6
0.3
131.2
42.9
56.5
7.9
Germany
-0.3
-2.4
34.1
35.0
11.8
54.2
6.6
France
0.7
28.4
12.8
-656.4
447.7
1,151.1
6.2
Australia
4.7
7.9
4.8
5.4
2.1
3.9
5.3
Norway
3.9
4.6
7.9
5.5
9.5
5.6
5.3
Sweden
4.4
3.5
3.4
4.3
4.9
46.2
59.4
Switz.
-5.9
1.0
6.1
2.1
4.0
3.9
4.2
UK
-11.9
-7.4
1.1
-15.9
44.8
142.3
0.2
EC
16.9
25.0
40.3
61.2
30.9
31.4
19.4
Multilateral
35.6
46.4
65.0
40.1
51.7
47.5
41.5
World Food
0.4
0.6
0.6
0.1
3.2
7.5
8.4
Program
Arab
..
..
.4
1.8
1.3
10.8
..
Countries
Total
156.6
76.07
188.6
-440.2
630.2
1,564.7
144.1
Source: Organisation for Economic Cooperation and Development. Source OECD,
International Development Statistics, on-line database. [http://stats.oecd.org]
Note: Data are from OECD members, multilateral agencies, and 12 other reporting nations
excluding South Korea, China, and Russia. Multilateral Agencies include the UN,
International Fund for Agricultural Development, Arab Agencies, and European Community.
EC = European Community. Total Receipts include Official Development Assistance +
Other Official Flows + Private Flows.
45 Seo, Soo-min. Questions Linger Despite President’s Statement. Korea Times, February
14, 2003. Dorgan, Michael. Secret Payment to North Korea Disclosed, Knight Ridder
Newspapers, January 30, 2003.

---

CRS-19
North Korea also receives funds in the form of official development assistance
(ODA) from aid donor nations, multilateral development banks, and other
organizations; other official flows; and private flows. The Organisation for
Economic Co-operation and Development (OECD) compiles these data from its
member nations plus 12 others and from multilateral agencies. The OECD data,
however, do not include reporting from South Korea (Seoul considers transactions
with the North as intra-country, not as foreign), China, or Russia (not members of
the OECD). As shown in Table 2, in 2004, net total receipts for North Korea came
to $1,564.7 million from donors, primarily because of a $1.151.1 million receipt
from France, $142.3 million from the United Kingdom, and $56.5 million from the
United States. In 2005, however, the net total dropped to $144.1 million as the
dispute over North Korea’s nuclear program escalated.
As shown in Table 3, much of the total receipts by North Korea came in the
form of official development assistance. In recent years, the country has received
between $73 and $201 billion in net official development assistance (ODA) from the
countries and agencies that report such data to the OECD. In 2004, total net ODA
was $195.9 million and in 2005 was $81.1 million. The major donors have been the
multilateral agencies, European Community, the United States, Sweden, Norway,
and Germany. South Korean, Chinese, and Russian aid to North Korea is not
included in the ODA data.
Table 3. North Korea: Net Official Development Assistance by
Major Source/Donor, 1999-2005
($ in millions)
Total Net Official Development Assistance
1999
2000
2001
2002
2003
2004
2005
U.S. 146.3
1.6
0.3
131.2
42.9
55.7
7.9
Germany
2.9
1.5
27.0
33.2
7.2
7.5
5.2
France
0.1
1.7
0.3
0.5
-0.4
-0.5
-0.4
Australia
4.0
7.1
4.6
2.0
2.1
3.3
4.6
Norway
3.9
3.3
3.5
3.6
4.4
5.6
5.3
Sweden
4.4
3.5
3.4
4.3
4.9
5.4
5.5
Switzerland
2.0
2.6
4.5
3.4
4.0
3.9
4.2
European
16.9
25.0
40.3
61.2
30.9
31.4
19.4
Community
Multilateral
35.6
46.4
65.0
75.5
51.7
47.5
41.5
Agencies
Total
200.8
73.3
117.6
265.2
167.8
195.9
81.1
Source: Organisation for Economic Cooperation and Development, Development Statistics
database.

---

CRS-20
The United States also has paid North Korea to search for remains of American
servicemen missing from the Korean War. In 2003, it paid $2.1 million to conduct
four searches.46
Table 4. Economic Aid and Other Official Flows From South
Korea to North Korea, 2000-2004 and Total 1995 to 2004
($ in millions)
Total
Year/ Type
2000
2001
2002
2003
2004
1995-
2004
Total
706.5
453.2
584.9
650.4
543.3
3,279.7
KEDOa
308.9
271.1
288.7
333.0
137.1
1,365.2
Food Aid Pledges
93.4
17.3
120.4
122.2
164.6
794.9
Fertilizer Pledges
83.4
49.5
66.6
70.1
89.8
387.9
Road & Rail Links
12.9
69.6
53.5
94.1
92.6
322.7
Payment for 2000
200.0
Summit
Mt. Kumgang Toursb
—
34.8
43.9
5.1
6.8
90.6
Aid to ROK Business
0.4
0.8
2.2
10.7
11.9
26.1
Kaesong Industrial
21.8
21.8
Complexb
Family Reunions
2.4
1.0
1.6
2.5
2.8
10.7
Otherc
5.0
9.1
7.9
12.8
15.9
50.7
Source: CRS Report RL31785, Foreign Assistance to North Korea, by Mark E. Manyin,
Appendix A. See report for data sources and analysis.
a. Korean Peninsula Energy Development Organization
b. Republic of Korea Export-Import Bank’s “DPRK Support Fund”
c. Includes Cultural Exchanges and Aid to non-governmental organizations
Since 2000, South Korean government assistance to North Korea has been
running at around $500 million per year ($543 million in 2004 and $419 million in
2006). South Korean civilian organizations also provide assistance to North Korea
($71 million in 2003).47 The KEDO item is for energy and funds provided to the
46 U.S. to Pay N. Korea for MIA Search. Associated Press. July 15, 2003. For details on
U.S. assistance to North Korea, see CRS Report RS21834, U.S. Assistance to North Korea:
Fact Sheet, by Mark E. Manyin.
47 Republic of Korea, Ministry of Unification. Inter-Korean Relations on the Occasion of
the 4th Anniversary of the June 15 Joint Declaration. June 18, 2004. p. 9.

---

CRS-21
Korean Peninsula Energy Development Organization in exchange for North Korea’s
pledge to dismantle its existing nuclear program. This program has been halted.48
Another major source of income for certain North Korean families has been in
remittances from overseas Koreans, particularly those who live in Japan.49 Most of
the North Koreans in Japan either remained there after World War II or are
descendants of those people. Some had been forcibly brought there to work in coal
mines or factories during the 50-year Japanese occupation of Korea. Currently, of
the approximately 650,000 ethnic Koreans who live in Japan, an estimated 56,000
to 90,000 are from the North Korean area, and many are reported to be actively
involved in supporting the Pyongyang regime. Ethnic Koreans in Japan work in a
variety of businesses and occupations, but they face discrimination in Japanese
society and are known for operating pachinko (pinball) parlors and other enterprises
providing entertainment and night life as well as being involved with Japan’s yakuza
or gangsters. Many of these, as well as managers of North Korean-related credit
unions, regularly send remittances to relatives or associates in North Korea. One
unusual method of smuggling money to North Korea has been to hide 10,000 yen
bills (worth roughly $90 each) under expensive melons being shipped to Kim Jong-il
as gifts.50
Given the decade of stagnation of the Japanese economy and rising tensions
between Japan and North Korea, these remittances have reportedly been declining.
A 2003 Japanese newspaper report placed the amount at between $200 million and
$600 million per year, but that figure could be exaggerated.51 In testimony before
parliament, Japan’s Finance Minister stated that in Japan’s FY2002, $34 million had
been sent from Japan to North Korea through financial channels that required reports
to the Japanese government.52 A working estimate would be approximately $100
million per year in such remittances. Anecdotal evidence indicates that considerable
amounts of currency from Japan are simply carried by individuals on ships and not
reported. More than 1,000 North Korean freight vessels had been traveling between
North Korea and Japan each year. Japan, however, has tightened inspections of
North Korean ships and curtailed operations of ferry boats traveling between the two
countries.53
In summary, the DPRK’s net total receipts plus remittances, aid and
investments from South Korea, and special food and fuel assistance in connection
with negotiations over Pyongyang’s nuclear program, constitute most of the overt
48 CRS Report RS21834, U.S. Assistance to North Korea: Fact Sheet, by Mark E. Manyin.
49 For details, see CRS Report RL32137, North Korean Supporters in Japan: Issues for U.S.
Policy, by Emma Chanlett-Avery.
50 Melons Used to Smuggle Cash to N Korea. Japan Today News (Online), January 1, 2003.
51 Remittance Law Reinterpreted Cash Transfers to Pyongyang May Be Suspended as
Deterrent. The Daily Yomiuri (Tokyo), May 19, 2003. p. 1.
52 Japanese Finance Minister Says “At Least” 34m US Dollars Sent to North Korea.
Financial Times Information, Global News Wire — Asia Africa Intelligence Wire. June 6,
2003.
53 See, for example, Masaki, Hisane. N Korea’s Missiles Met by Japanese Sanctions, Asia
Times Online, July 6, 2006.

---

CRS-22
resource inflows that North Korea receives each year over and above its export
earnings. These amount to perhaps a half billion dollars per year but can be offset
by loan repayments. North Korea must finance the remainder of its trade deficit —
which is about $1.7 billion — by other means. It appears that these other means
include exports of military equipment, counterfeiting currency, and trade in illegal
substances.
Illegal or Questionable Sources of Funds54
Data on North Korean sales of military equipment abroad is understandably
murky, but the country is thought to have sold hundreds of ballistic missiles to Iran,
Iraq, Syria, Pakistan, and other nations in the past decade to earn foreign currency.55
The interdiction by Spain of an unmarked vessel in December 2002 containing parts
for 12 to 15 Scud missiles (valued at about $4 million each) bound for Yemen from
North Korea is one example of such arms sales.56 In testimony before the House
Committee on International Relations, the Undersecretary of State for Arms Control
and International Security pointed out that North Korea possesses Scud and No-
Dong missiles and is developing the Taepo-Dong 2. He stated that the country is by
far the most aggressive proliferator of missiles and related technologies to countries
of concern. These sales are one of the North’s major sources of hard currency.57
According to a U.S. military officer quoted in the Japanese press, North Korea
exported $580 million worth of ballistic missiles to the Middle East in 2001.58
Between 1998 and 2001, North Korea is estimated to have exported some $1 billion
in conventional arms to developing nations.59
With respect to illegal drug trade, officials from the U.S. military command in
Seoul reportedly said that North Korea is earning between $500 million and $1
billion annually from the narcotics trade.60 North Korea is thought to produce more
than 40 tons of opium per year which would make it the world’s third-largest opium
exporter and sixth-largest heroin exporter. The regime also is accused of trafficking
in methamphetamine stimulants. U.S. counter-narcotics officials are reported to have
said that since 1976, there have been at least 50 arrests or drug seizures involving
54 See CRS Report RL33885, North Korean Crime-for-Profit Activities, by Raphael F. Perl
and Dick K. Nanto.
55 Asano, Yoshiharu. N. Korea Missile Exports Earned 580 Mil. Dollars in ‘01. Daily
Yomiuri, May 13, 2003.
56 Solomon, Jay. U.S. Debates North Korean Exports, Asian Wall Street Journal, May 5,
2003. p. A1.
57 Testimony of John R. Bolton, Under Secretary for Arms Control and International
Security, U.S. Department of State. U.S. House Committee on International Relations, June
4, 2003.
58 Asano, Yoshiharu. N. Korea Missile Exports Earned 580 Mil. Dollars in ‘01. Daily
Yomiuri, May 13, 2003. Pearson, Brendan. Illicit Boost for N Korea Economy. Australian
Financial Review, May 14, 2003. p. 12.
59 CRS Report RL33696, Conventional Arms Transfers to Developing Nations, 1998-2005,
by Richard F. Grimmett. p. 53. This figure is rounded to the nearest $100 million.
60 Paddock, Richard C. and Barbara Demick. N. Korea’s Growing Drug Trade Seen in
Botched Heroin Delivery, Washington Post, May 21, 2003.

---

CRS-23
North Koreans in more than 20 countries. Japanese authorities say that nearly 50%
of illegal drug imports into Japan come from North Korea.61 According to the U.S.
State Department, although such reports have not been conclusively verified by
independent sources, defector statements have been consistent over years and occur
in the context of regular narcotics seizures linked to North Korea. The State
Department’s International Narcotics Control Strategy Report for 2003 states that
quantity of information and quality of many reports “give credence to allegations of
state sponsorship of drug production and trafficking that can not be ignored. It
appears doubtful that large quantities of illicit narcotics could be produced in and/or
trafficked through North Korea without high-level party and/or government
involvement, if not state support.”62
In a blatant incident in May 2003, the Australian navy and special forces
commandeered a North Korean ship (Pong Su) off the country’s southern coast that
allegedly was moving 110 pounds of almost pure heroin valued at $50 million. The
ship apparently picked up the heroin elsewhere in Asia and took a circuitous route
to Australia.63
Allegations also have been made that North Korea engages in counterfeiting
operations, particularly of U.S. $100 notes. It is believed that the country earns $15
million to $20 million per year in counterfeiting.64
In the opinion of a North Korean expert at Seoul’s Sejong Institute, “North
Korea’s economy had received a death sentence long ago, but it keeps afloat thanks
to international aid and the country’s trading in weapons and illicit goods.”65
Since late 2005, the United States has taken several measures to reduce illicit
financial activities by North Korea. On June 28, 2006, President Bush issued
Executive Order 13382 (Blocking Property of Weapons of Mass Destruction
Proliferators and Their Supporters).66 On October 21, 2005, pursuant to Executive
Order 13382, the U.S. Treasury designated eight North Korean entities as
proliferators of weapons of mass destruction and their delivery vehicles. The action
prohibits all transactions between the designated entities and any U.S. person and
freezes any assets the entities may have under U.S. jurisdiction.67
61 Kim, Ah-young, Halt North Korea’s Drug Habit; a Narcotic State, International Herald
Tribune, June 18, 2003. p. 8.
62 U.S. Department of State. International Narcotics Control Strategy Report, 2003. May
2004.
63 Struck, Doug. Heroin Trail Leads to North Korea. Washington Post Foreign Service,
May 12, 2003. p. A01.
64 For details, see CRS Report RL33324, North Korean Counterfeiting of U.S. Currency, by
Raphael F. Perl and Dick K. Nanto.
65 Choe, Sang-Hun. N. Korea Sees Sanctions Amid Tough Times. Associated Press Online,
June 12, 2003.
66 Available at [http://www.whitehouse.gov/news/releases/2005/06/20050629.html].
67 U.S. Department of the Treasury. Treasury Targets North Korean Entities for Supporting
WMD Proliferation. Press Release JS-2984, October 21, 2005.

---

CRS-24
On September 15, 2005, the U.S. Treasury designated Banco Delta Asia SARL
as a “primary money laundering concern” under Section 311 of the Patriot Act
because it represents an unacceptable risk of money laundering and other financial
crimes. Treasury stated that “Banco Delta Asia has been a willing pawn for the
North Korean government to engage in corrupt financial activities through Macau
....”68 On March 14, 2007, the Treasury finalized its rule against Banco Delta Asia,
barring the bank from accessing the U.S. financial system, but allowing for the $25
million in North Korean funds held to be released.
U.S.-DPRK Trade Relations
U.S. trade with the DPRK is quite limited. The United States does not maintain
any diplomatic, consular, or trade relations with North Korea, and the country does
not have normal trade relations (most favored nation) status. This means that North
Korean exports are subject to the relatively high tariffs existing before World War
II in the United States. For example, women’s blouses of wool or cotton carry a 90%
import duty if from North Korea but are duty free if from Canada, Israel, or Mexico
or are subject to 9 to 10% duty if from most other nations. As a communist nation,
North Korea also does not qualify for duty-free treatment of certain products that are
imported from designated developing countries under the generalized system of
preferences program.69
The United States, moreover, maintains various economic sanctions on North
Korea because it is on the U.S. State Department list of state supporters of
international terrorism, is considered a threat to national security, is a communist
state, and it proliferates weapons of mass destruction.70 Travel to and trade with
North Korea in other than dual-use goods are allowed if overarching requirements
are met, and there are no restrictions on the amount of money Americans may spend
in the DPRK. The sanctions related to the proliferation of weapons of mass
destruction generally target the offending entities. North Korean assets in the United
States frozen prior to June 19, 2000, remain frozen. North Korea is on the most
restricted list of countries for U.S. exports (Country Group E list) of items such as
computers, software, national security-controlled items, items on the Commerce
Control List,71 and service or repair of such items. Economic sanctions on North
Korea, however, are essentially unilateral by the United States. Most other nations
allow relatively free trade in non-sensitive goods with the DPRK.
The issue of trade with the DPRK has arisen during negotiations between the
United States and South Korea on the proposed Korea-U.S. Free Trade Agreement.
South Korea has proposed that products from the Kaesong Industrial Complex in
North Korea be included in the FTA. In essence, this would require that the rules of
68 U.S. Department of the Treasury. Treasury Designates Banco Delta Asia as Primary
Money Laundering Concern under USA PATRIOT Act. Press Release JS-2720, September
15, 2005.
69 See CRS Report 97-389, Generalized System of Preferences, by William H. Cooper.
70 See CRS Report RL31696, North Korea: Economic Sanctions, by Dianne E. Rennack.
71 [http://w3.access.gpo.gov/bis/ear/ear_data.html]

---

CRS-25
origin in the FTA allow products made in Kaesong by South Korean firms to enter
the United States duty free or under the duty stipulated in the FTA. Reportedly, the
United States has not agreed to this provision thus far.72
The United States uses trade with North Korea as leverage and to send a
message of disapproval for various activities by Pyongyang. Unless the political
situation between North Korea and the United States is resolved, prospects for
increased bilateral trade are dim. In addition to high tariffs and trade sanctions, the
United States has blocked North Korea’s admission to membership in international
financial institutions (such as the World Bank, International Monetary Fund, and
Asian Development Bank) which also would allow the DPRK to receive
development assistance that would help finance additional imports from countries
such as the United States.
Table 5. U.S. Trade by Commodity With the Democratic
People’s Republic of Korea (North Korea) in 2004-2006
($ in thousands)
SITC Category
U.S. Exports
U.S. Imports
Year
2004
2005
2006
2004
2005
2006
Cereals and Cereal
Preparations 10,285
2,277
0
0
0
0
Fixed Vegetable Fats
and Oils
4,259
0
0
0
0
0
Vegetables
3,461
1,806
0
0
0
0
Preparations of Cereal,
Flour, starch or Milk;
Bakers Wares
2,459
0
0
0
0
0
Misc. Grain, Seed, Fruit
1,573
0
0
0
Dairy Products and
Birds’ Eggs
1,157
0
0
0
0
0
Misc. Textile Articles
191
0
0
0
0
0
Organic Chemicals
0
0
0
1,418
0
0
Woven Apparel
0
0
0
77
0
0
Tools, Cutlery
0
0
0
0
3
0
Books, Newspapers
0
0
3
0
0
Total
23,750
5,757
3
1,495
3
0
Source: U.S. Department of Commerce accessed through World Trade Atlas.
72 See CRS Report RL33435, The Proposed South Korea-U.S. Free Trade Agreement
(KORUS FTA), by William H. Cooper and Mark E. Manyin.

---

CRS-26
Table 5 shows U.S. trade with North Korea for 2004-2006. In 2004, U.S.
exports to the DPRK of $23.8 million were mostly for food provided as humanitarian
aid. In 2005, food aid was down to $5.8 million, and in 2006 had ceased. In 2006,
the only U.S. exports were books and newspapers worth $3,000. As for imports, in
2004, the United States imported $1.5 million in organic chemicals plus $77,000 in
woven apparel from North Korea. In 2005, imports had dropped to $3,000 worth of
tools and cutlery, and were nil in 2006.
Table 6 shows U.S. merchandise exports, imports, and trade balances with
North Korea since 1990. Imports have been zero or relatively low with a peak of
$1,495,000 in 2004. Almost all of these imports from North Korea were organic
chemicals and woven apparel. A possible concern is that imports of books,
newspapers, and manuscripts have dropped to zero. For a country with great
strategic importance to the United States, information on North Korea is not flowing
directly into the U.S. market. U.S. exports at $23,750,000 in 2004 rose from $32,000
in 1990 to $25,012,000 in 2002. Another peak occurred in 1995 when U.S. exports
totaled $11,607,000. Of this amount, $10,810,000 was in cereals. The United States
has been running a small annual surplus in its trade with North Korea, but the food
aid has been provided without cost to North Korea.
According to the U.S. Department of Commerce, the United States has no direct
investment in North Korea.73 An American company interested in doing business
in North Korea, particularly establishing a company, likely would work through an
overseas subsidiary. Some American business executives with the U.S. Chamber of
Commerce in South Korea, for example, reportedly travel to North Korea for
business purposes,74 and some U.S. enterprises reportedly are working as
subcontractors in the development of North Korea’s Kaesong industrial complex.75
73 U.S. Bureau of Economic Analysis. U.S. Direct Investment Abroad Detail for Historical-
Cost Position and Related Capital and Income Flows, 2001. Survey of Current Business,
September 2002, p. 94.
74 Meeting with President of the American Chamber of Commerce and CRS analysts, April
7, 2003, Washington, DC.
75 Koo, Kyung-hee. U.S. Enterprises Participate in Developing the Gaeseong Industrial
Complex. KOTRA-North Korea Team. January 30, 2004. Reprinted in KOTRA Bulletin,
February 11, 2004.

---

CRS-27
Table 6. U.S. Merchandise Exports, Imports, and Trade
Balances with North Korea, 1990-2006
($ in thousands)
Year
U.S. Exports
U.S. Imports
Balance
1990
32
0
32
1991
484
10
474
1992
83
0
83
1993
1,979
0
1,979
1994
180
0
180
1995
11,607
0
11,607
1996
541
0
541
1997
2,409
0
2,409
1998
4,454
0
4,454
1999
11,265
29
11,236
2000
2,737
154
2,583
2001
650
26
624
2002
25,012
15
24,997
2003
7,977
0
7,977
2004
23,750
1,495
22,255
2005
5,757
3
5,754
2006
3
0
3
Source: U.S. Department of Commerce through World Trade Atlas.
North-South Korean Economic Relations
Economic relations have been a major route for opening relations between
North and South Korea. Seoul has a major stake in relations with the DPRK and the
outcome of the current Six-Party Talks.76 It seeks a “soft landing” for the current
standoff over the North’s nuclear program — one that will lead to a lessening of
tensions and steady integration of North Korea’s economy into the global economic
and financial system. As with other countries divided by ideology and a history of
hostilities as “pawns” on the chess board of the Cold War, the two halves of the
peninsula face numerous issues to be resolved before they can normalize relations
— let alone contemplate reunification.
76 The Six-Party Talks are made up of representatives from the United States, Japan, North
Korea, South Korea, Russia, and China.

---

CRS-28
South Korea has much to gain from rapprochement with the North. Its strategy
has been to use its economic leverage and family reunions (families separated by the
division of the Korean Peninsula) to open channels with the North Korean people
while maintaining a credible military deterrent to overt hostile action by Pyongyang.
South Korea recognizes that essentially it has won the Cold War on the Korean
peninsula, but it recoils at the prospect of funding economic rehabilitation in the
DPRK as West Germany did with East Germany. Seoul also recognizes that its
economic ties are gradually shifting from reliance on the American market to greater
integration with China, Japan, and other countries of Asia. Its labor costs are rising,
and many of its companies are remaining competitive only by manufacturing in
China and other low-wage markets. For them, the prospect of abundant cheap labor
just a short distance to the north is appealing and perhaps an alternative to cheap
labor in China.
In 2006, total merchandise trade between the two Koreas reached $1,349.7
million, more than triple the $403.0 million just five years earlier. The largest
increases have been in South Korean exports ($830.2 million in 2006), although
imports also have risen ($519.6 million in 2006). Much of the increase in exports
has been in the form of food and industrial goods. In 2006, $419.3 million in South
Korean exports to the North were actually South Korean aid shipments.
The major items purchased by South Korea from the North include
food/aquatic/forestry products, textiles, steel/metal products, and electronics. The
major South Korean exports to North Korea include chemicals, textiles, machinery,
steel/metal products, and food/forestry products.
Since 1992, particularly under the Sunshine Policy of former South Korean
President Kim Dae Jung and under the Policy for Peace and Prosperity of current
President Roh Moo-hyun, Seoul has permitted its corporations to pursue business
interests in North Korea. In 2003, the government allowed activities by 89
companies including 35 involved in contract processing (assembly, sewing, or other
processing done under contract) by North Koreans.77 The companies included
Daewoo (jackets, bags), Samsung Electronics (communications center, switchboard),
Samcholi Bicycle, Green Cross (medicine), International Corn Foundation (corn
seeds), Hyundai (Mt. Kumkang tourism, development), and Hanshin Co. (glass).
The Korea Electronic Power Corporation’s work on the construction of a light water
nuclear power plant under the U.S.-North Korean 1994 Agreed Framework has been
halted.78 One global strategy of South Korean businesses is to develop processing
sites in North Korea to take advantage of low labor costs there; in some cases, labor
costs are competitive with those in China. The two countries also have taken some
halting steps toward linking their economic systems. In addition to the business
77 Speech by Minister Jeong Se-hyun on the 34th Anniversary of the Ministry of Unification.
Korean Unification Bulletin, No. 53, March 2003.
78 In March 1996, KEPCO was designated the prime contractor for the construction of two
1,000MW light water nuclear reactors in North Korea for KEDO (Korean Peninsula Energy
Development Organization). It broke ground near Sinpo in August 1997. By the end of
2001, the project was 16% completed with some 1,200 workers employed. For details on
the Agreed Framework, see CRS Report RL33590, North Korea’s Nuclear Weapons
Development and Diplomacy, by Larry Niksch. For the approval list, see KOTRA,
Companies Approved for South-North Korean Economic Cooperation.

---

CRS-29
relationships, since September 2002, the two countries have been reconnecting the
Gyeongui (Seoul-Sinuiju) and Donghae (East Sea) railway lines and adjacent
highways.
As discussed in the section above on Economic Reforms and Free Trade Zones,
the focus of North-South economic cooperation now is the Kaesong Industrial
Complex (KIC). Managed by South Korea’s Hyundai Asan and Korea Land
Corporation and located just over the border in North Korea, this 810 acre complex
already has attracted small and medium sized enterprises from South Korea. The
KIC accounts for much of the increased commercial trade between the North and the
South. In 2006, the KIC produced some $7.5 million worth of goods each month.79
It provides small- and medium-sized South Korean firms with a low-cost supply of
labor for manufacturing products, provides jobs for North Korean workers, and
provides needed hard currency for Pyongyang.
North Korea depends more on South Korea in international trade than South
Korea does on the North. North Korea accounts for less than 1% of total South
Korean exports, while North Korean exports to South Korea account for more than
a third of total North Korean exports. South Korea has access to global markets for
many of its world class industries (automobiles, semiconductors, consumer
electronics, etc.), while North Korea faces restricted markets for its limited array of
exports.
79 South Korea to Continue “Utmost Efforts” for Inter-Korean complex — Minister. Yonhap
News Agency. Reported by BBC Monitoring Asia Pacific. London, December 8, 2006.

---

CRS-30
Table 7. South Korean Merchandise Trade with North Korea,
1990-2006
($ in thousands)
South Korean
South Korean
Total
Year
Balance
Imports
Exports
Trade
1990
12,278
1,188
13,466
-11,090
1991
105,719
5,547
111,266
-100,172
1992
162,863
10,563
173,426
-152,3
1993
178,167
8,425
186,592
-169,742
1994
176,298
18,249
194,547
-158,049
1995
222,855
64,436
287,291
-158,419
1996
182,400
69,639
252,039
-112,761
1997
193,069
115,270
308,339
-77,799
1998
92,264
129,679
221,943
37,415
1999
121,604
211,832
333,436
90,228
2000
152,373
272,775
425,148
120,402
2001
176,170
226,787
402,957
50,617
2002
271,575
370,155
641,730
98,580
2003
289,252
434,965
724,217
145,713
2004
258,000
439,000
697,000
181,000
2005
340,300
715,500
1,055,800
375,200
2006
519,563
830,198
1,349,761
310,635
Sources: South Korea Ministry of Unification, KOTRA.
China-DPRK Economic Relations
China remains North Korea’s chief ally. In addition to sharing its status as one
of the last communist regimes in the world, China views the Korean peninsula as
vital to its strategic interests. Beijing values North Korea as a buffer between the
democratic South Korea and the U.S. forces stationed there, as a rationale to divert
U.S. and Japanese resources in the Asia Pacific toward dealing with Pyongyang and
less focused on the growing military might of China, and as a destination for Chinese
foreign investment and trade. Beijing arguably has more influence in Pyongyang
than any other nation.
Cooperation between the two countries is extensive but often strained. In 1961,
China and the DPRK signed a mutual defense pact, but recently a Chinese official
reportedly said that they are not “well informed of the internal situation of the North

---

CRS-31
Korean military” and that the DPRK “does not listen to what China has to say.”80
(This presumably referred to Pyongyang’s missile and nuclear tests.) Also with
respect to North Korean refugees, their first destination is usually northeastern
China. According to Human Rights Watch, China labels North Korean
border-crossers as illegal economic migrants, rather than refugees or asylum seekers,
and usually sends them back to North Korea.81
China also is hosting and facilitating the ongoing Six-Party Talks that seek a
resolution to the North Korean nuclear problem.
In August 2001, Chinese President Jiang Zemin visited Pyongyang and
promised increased humanitarian and economic assistance. In April 2004, Kim
Jong-il visited Beijing to discuss food aid and nuclear issues.
According to Jane’s Information Group, several issues have arisen to cause
friction in the Sino-North Korean relationship. These include
!
Chinese exasperation at the DPRK’s failure to reform its economy;
!
Pyongyang’s prevarication over the nuclear and peace treaty issues
and the consequent dangerous stimulus this provides to proliferation
in the region;
!
The nuclear standoff with the United States and Pyongyang’s
possession of nuclear weapons;
!
Growing economic and political rapport between Pyongyang and
Taipei;
!
The North Korean refugee problem on the China-DPRK border;
!
Pyongyang’s missile testing, prompting Japan to acquire a Theater
Missile Defense system, with Taiwan wishing to be included;
!
North Korea’s construction of underground missile sites close to the
Chinese border; and
!
North Korea’s cavalier attitude towards business. (China
occasionally suspends shipments of humanitarian aid to the DPRK
because Pyongyang regularly ‘forgets’ to return Chinese railroad
rolling stock.)82
In 2006, Pyongyang’s missile and nuclear tests severely strained relations
between China and the DPRK. Beijing had warned the DPRK not to conduct either
of the tests and “lost face” when Pyongyang went ahead with them anyway. As a
result, for the first time China agreed to UN resolutions imposing sanctions on the
DPRK83 and also took measures to halt banking transactions with North Korean
entities and to curtail shipments of petroleum. China, however, did not agree to
80 Chu, Wan-chung. These Days, North Korea Does not Even Listen to China. Chosun Ilbo,
August 7, 2006. Reprinted by BBC Monitoring Asia Pacific, August 10, 2006.
81 Human Rights Watch. China: Protect North Korean Refugees, March 9, 2004. James D.
Seymour. China: Background Paper on the Situation of North Koreans in China, A Writenet
Report by commissioned by United Nations High Commissioner for Refugees,Protection
Information Section, January 2005.
82 Jane’s Information Group, op. cit.
83 See UN Security Council Resolution 1718, October 14, 2006.

---

CRS-32
conduct inspections of shipments along its borders with North Korea. Some
analysts indicate that Pyongyang may be growing weary of its lop-sided relations
with Beijing and may be attempting to become more independent. Pyongyang may
view nuclear weapons as a “trump card to intimidate China as much as the United
States.”84
Since the collapse of the Soviet Union, China has been the DPRK’s largest
trading partner and supplier of concessional assistance (through subsidized trade and
direct transfers). As an export market and source of imports, however, North Korea
plays a relatively minor role for China. In 2006, the DPRK ranked 65th among
China’s export markets — smaller than Bulgaria, Egypt, or Hungary. As a source
of imports, North Korea ranked 64th — below Gabon, Peru, or Belgium.
Table 8. China’s Merchandise Trade with the DPRK, 1995-2006
($ in millions)
China’s
Total
China’s
Year
China’s Exports
Imports
Trade
Balance
1995
63.609
486.037
549.646
422.428
1996
68.638
497.014
565.652
428.376
1997
121.610
534.411
656.021
412.801
1998
51.089
356.661
407.750
305.572
1999
41.722
328.634
370.356
286.912
2000
37.214
450.839
488.053
413.625
2001
166.797
570.660
737.457
403.863
2002
270.863
467.309
738.172
196.446
2003
395.546
627.995
1,023.541
232.449
2004
582.193
794.525
1,376.718
212.332
2005
496.511
1,084.723
1,581.234
588.212
2006
467.718
1,231.886
1,699.604
764.168
Sources: Chinese (PRC excluding Hong Kong) data as supplied by World Trade Atlas.
China also provides aid directly to Pyongyang. By bypassing the United
Nations, China is able to use its assistance to pursue its own political goals
independently of the goals of other countries. It is widely believed that Chinese food
aid is channeled to the military. This allows the World Food Program’s food aid to
84 Kahn, Joseph. China May Press North Koreans. The New York Times, October 20, 2006.
P. A1.

---

CRS-33
be targeted at the general population without risk that the military-first policy or
regime stability would be undermined by foreign aid policies of other countries.85
In November 2003, China reportedly transferred responsibility for securing its
border with North Korea from the police to its army.86 Many of China’s two million
ethnic Koreans live along this border, and it is a favorite crossing point for refugees
from North Korea. In 2006, China built a 20-kilometer long fence along its border
with North Korea. It is located primarily along areas where the Yalu River dividing
the two countries is narrow and the river banks low.87 Much of China’s trade with
the DPRK goes through the port of Dandong on the Yalu River. In 2002, 40% of
Chinese exports to and 11% of its imports from North Korea passed through
Dandong.88
China’s major imports from North Korea include mineral ores, mineral fuels
and oil, woven apparel, fish and seafood, iron and steel, and wood. China’s major
exports to North Korea include mineral fuels and oil, meat, electrical machinery,
machinery, plastic, man-made filament, vehicles, and iron and steel.
Japan-DPRK Economic Relations
Japan’s economic relations with North Korea have declined sharply as tension
over Pyongyang’s nuclear and missile programs has spiked. After North Korea test
launched several missiles in July 2006 and then detonated a nuclear device in
October 2006, Japan imposed strict unilateral sanctions, causing bilateral trade to
plummet. Japan banned imports and most North Korean nationals from entering
Japan, prohibited all North Korean ships from entering Japanese ports, and outlawed
the export of “luxury goods” to North Korea, including caviar, jewelry, liquor, and
any food known to be favored by North Korean leader Kim Jong-il.
This pattern is a reversal of earlier economic relations. Although Japan and
North Korea have never established official diplomatic relations, the two nations
maintained significant economic ties for well over a decade. From the end of the
Cold War, Japan was second only to China among North Korea’s top trading
partners. Bilateral trade declined considerably in the 1980s, but the drop was
attributed primarily to the steep overall downturn of the North Korean economy as
much as the state of bilateral relations. Before relations deteriorated, Japanese
85 Babson, Bradley O. Towards a Peaceful Resolution with North Korea: Crafting a New
International Engagement Framework Paper presented at a conference sponsored by the
American Enterprise Institute, Korea Economic Institute, and Korea Institute for
International Economic Policy, Washington, DC, February 12-13, 2004.
86 Foley, James. China Steps Up Security on North Korean Border. Jane’s Intelligence
Review, November 1, 2003.
87 China Erects Massive Fence on N. Korean Border After Test. World Tribune.com,
October 25, 2006. Schafer, Sarah. Threatening the Whole World, on China’s Border with
North Korea, Local Villagers Fear the Fallout from Pyongyang’s Nuclear Aspirations,
Newsweek, October 12, 2006. (Internet edition).
88 Lee, Chang-hak. China’s Trade with N.K. Via Dandong Exceeds US $200 million.
KOTRA, February 21, 2003.

---

CRS-34
leaders made several efforts to normalize relations with North Korea, promising
considerable economic assistance to the country. Since 2002, however, North
Korea’s provocative missile and nuclear device tests, along with the issue of
Japanese citizens kidnapped by North Korean agents in the 1970s and 1980s, has
stalled any further diplomatic progress and retarded economic relations. From
2001-2005, Japan’s share of North Korean trade declined as China, South Korea, and
Russia expanded trade with Pyongyang. By 2006, total trade between Japan and the
DPRK fell to $120 million from $1,290 million in 2001.
Table 9. Japan’s Merchandise Trade with the DPRK, 1994-2006
($ in millions)
Japan’s
Total
Japan’s
Year
Japan’s Exports
Imports
Trade
Balance
1994
328.313
171.092
499.405
-157.221
1995
338.073
253.798
591.871
-84.275
1996
290.745
226.480
517.225
-64.265
1997
301.796
178.942
480.738
-122.854
1998
219.489
175.137
394.626
-44.352
1999
202.564
147.839
350.403
-54.725
2000
256.891
206.760
463.651
-50.131
2001
225.618
1,064.519
1,290.14
838.901
2002
235.840
132.645
368.485
-103.195
2003
174.390
91.445
265.835
-82.945
2004
164.299
88.743
253.042
-75.556
2005
132.277
62.505
194.782
-69.772
2006
76.418
43.860
120.278
-32.558
Source: Japanese data as supplied by World Trade Atlas.
Seafood makes up almost half of the North’s exports to Japan, followed by
electrical machinery, aluminum and articles thereof, mineral fuels, and apparel.
North Korean clams and matsutake mushrooms are particularly prized in the
Japanese market. Japan sends items such as vehicles, electrical machinery,
boilers/reactors, manmade filaments, wool, and articles of iron or steel to North
Korea. Some Japanese lawmakers have argued that Japan should expand the ban on
imports from North Korea to cover exports as well.
Japan’s food aid to North Korea has also dwindled as relations soured. The
pattern of Japanese aid reflects developments in the political relationship between
Tokyo and Pyongyang: shipments began in 1995 and 1996 when relations warmed,
were temporarily suspended periodically as tensions mounted, and eventually ceased
altogether in late 2004 because of disagreement over the abduction issue. Between

---

CRS-35
1995 and 2004, Japan provided 1.2 million metric tons of humanitarian food aid to
North Korea, mostly through the United Nations World Food Program.89
A group of pro-Pyongyang ethnic Koreans living in Japan known as the Chosen
Soren (Chongryun in Korean) in the past provided North Korea with additional funds
in the form of cash remittances and, possibly, facilitated illicit trade such as drug
trafficking and counterfeiting. Although the exact amount of remittances is
unknown, the total appeared to be in the neighborhood of $100 million per year but
declined sharply since the early 1990s. A series of scandals involving ethnic Korean
banks in Japan revealed that money was illegally channeled to North Korea through
the network of Chosen Soren-affiliated credit unions. Following the missile tests in
2006, Japan froze fund transfers and overseas remittances by 15 groups and one
individual suspected of links to North Korean weapons programs, and established
rules that require financial institutions to report to the Japanese government
remittances overseas of more than 300 million yen.
A thorn in the relations between Japan and the DPRK has been the issue of
Japanese citizens abducted by North Korea, ostensibly to be used by their
government to teach Japanese language and culture. The bilateral talks in 2007 on
normalizing relations between the two countries broke down over the issue of the
abductees.
Russia-DPRK Economic Relations
Russian reforms and the end of the Cold War greatly reduced the priority of the
DPRK in the strategy of Russian foreign policy. Following Soviet support of North
Korea in the Korean War, the USSR provided assistance to Pyongyang that helped
equip its military and create its heavy industrial sector. In 1998, at the peak of the
bilateral relationship, about 60% of North Korea’s trade was with the Soviet Union.
Much of the trade was in raw materials and petroleum that Moscow provided to
Pyongyang at concessional prices. Relations between the two cooled in the 1990s
as Russia recognized South Korea, announced that trade with North Korea was to be
conducted in hard currencies, and opted out of its bilateral defense agreement.90
Recently, overall relations between Russia and North Korea have been
improving. Russia is upgrading its railway connections with North Korea and has
been participating in an ambitious plan to build a trans-Korean railway. As is the
case with China and South Korea, Russia is critical to North Korean security, since
Russia shares a border with the DPRK, and Russian cooperation would be necessary
to enforce any security guarantee. As fuel aid from abroad has decreased, moreover,
North Korea has turned again toward Russia as a source of supply.
Still, the DPRK’s trade with Russian lags behind what it has been in the past.
In 2006, North Korea ranked 98th among Russia’s sources of imports (below Jamaica
and El Salvador) and 64th in terms of markets for Russian exports (below the Virgin
89 CRS Report RL31785, Foreign Assistance to North Korea, by Mark Manyin.
90 Lunev, Stanislav. New Era in Russian-North Korean Relations. Newsmax.com, August
23, 2000.

---

CRS-36
Islands and Armenia). The increasing volume of Russian mineral fuel exports to the
DPRK has moved Russia past Japan, Germany, and Thailand to become North
Korea’s third largest trading partner.
Major Russian exports to the DPRK include mineral fuels, wood and pulp,
fertilizers, machinery, iron/steel, and wood. The large increase in Russian exports
have come mostly in mineral fuel oil which increased from $20 million in 2002 to
$170 million in 2006 (down from $198 million in 2005). Pyongyang had to turn to
Russia for petroleum, as supplies of fuel oil from the United States, Japan, and South
Korea were curtailed as the Six-Party Talks bogged down. Major Russian imports
from North Korea include machinery, electrical machinery, and manmade staple
fibers.
Table 10. Russia’s Merchandise Trade with the DPRK,
1994-2006
($ in millions)
Russia’s
Russia’s
Year
Total Trade
Balance
Imports
Exports
1994
44.00*
52.00*
96.00*
8.00*
1995
15.00*
70.00*
85.00*
55.00*
1996
347.00*
525.00*
872.00*
178.00*
1997
16.790
72.449
89.239
55.659
1998
8.463
56.497
64.960
48.034
1999
7.208
48.507
55.715
41.299
2000
7.633
35.631
43.264
27.998
2001
14.664
56.099
70.763
41.435
2002
10.317
47.404
57.721
37.087
2003
2.903
112.343
115.246
109.440
2004
4.575
204.665
209.240
200.090
2005
6.862
224.402
231.264
217.540
2006
20.076
190.563
210.639
170.487
Sources: Russian data as supplied by World Trade Atlas.
*1994-96 data from International Monetary Fund. Direction of Trade Statistics.
In December 2006, Russia reportedly agreed to write off some 80% of the $8
billion in debt owed it by the DPRK. North Korea had borrowed the funds in the
1960s to build power plants. This opens the way for Russia to engage in more

---

CRS-37
economic cooperation with the DPRK and to facilitate progress in the Six-Party
Talks.91
U.S. Interests, Strategy, and Policy
The three legs of any grand strategy toward the DPRK include economic,
diplomatic, and military means to accomplish U.S. goals and protect U.S. national
interests. This report examines the economic side of this triad of strategic policy
instruments but also reviews the diplomatic and military aspects of U.S. policy in
order to provide a policy context.
U.S. Interests, Goals, and Strategy
The DPRK threatens several U.S. national interests. It threatens U.S. security
through its development and potential proliferation of nuclear weapons as well as
other weapons of mass destruction. North Korea’s missile delivery systems currently
can reach South Korea and Japan, and it is reportedly developing a missile (Taep’o-
dong 2) that can reach the continental United States.92 Its conventional forces are
concentrated along the demilitarized zone within striking distance of South Korean
population centers and U.S. forces. North Korea’s dictatorial, communist, and
oppressive regime headed by Kim Jong-il runs counter to U.S. values of freedom,
liberty, human rights, democracy, and economic choice.
The national security strategy of the United States touches on North Korea
mainly through the following broadly stated goals: (1) to prevent enemies from
threatening the United States, allies, and friends with weapons of mass destruction;
(2) to strengthen alliances to defeat global terrorism and to work to prevent attacks
against the United States or friendly countries; (3) to work with others to defuse
regional conflicts; (4) to ignite a new era of global economic growth through free
markets and trade; and (5) to champion aspirations for human dignity.93
As applied to the DPRK, the immediate U.S. goals include (1) to halt or
eliminate North Korea’s development of nuclear or other weapons of mass
destruction; (2) to curtail illegal and questionable activities by North Korea to
include illicit sales of missiles,94 dealing in illegal drugs, counterfeiting of currency,
and proliferation of weapons of mass destruction, particularly to terrorist groups; (3)
to reduce the threat of war on the Korean peninsula; (4) to ensure that North Korea
does not participate in international terrorist activity; (5) to induce economic,
political, and societal change in the country that could bring about favorable changes
91 Russa to Forgive Most of N. Korea’s Debt. The Chosun Ilbo (digital version), January 5,
2007.
92 See CRS Report RS21473, North Korean Ballistic Missile Threat to the United States, by
Andrew Feickert.
93 The White House. The National Security Strategy of the United States of America.
September 2002.
94 See CRS Report RS21473, North Korean Ballistic Missile Threat to the United States, by
Steven A. Hildreth.

---

CRS-38
in the Kim regime, in governance, in the standard of living of its people, and in
attitudes toward the United States, and (6) to enhance the security of South Korea
and Japan with respect to the DPRK.
Conventional wisdom with respect to North Korea includes the following
assumptions: (1) without stringent monitoring mechanisms, Pyongyang probably
will cheat on any agreement; (2) North Korea regularly breaks international laws or
treaties dealing with activities such as the non-proliferation of weapons of mass
destruction, illicit drug trade, or counterfeiting of currency; (3) economic privation
in North Korea mainly affects the population outside of Pyongyang and only
indirectly affects the military and party leaders; (4) popular sentiment opposing the
current regime is weak or suppressed sufficiently for Kim Jong-il to remain in power
for an indefinite period of time; (5) a U.S. military attack on North Korea would
result in an immediate counter-attack on Seoul and other targets in South Korea
using existing conventional weaponry that would cause extensive damage; and (6)
any North Korean use of nuclear bombs on the United States or its allies would
trigger retaliation that likely would destroy Pyongyang, its military installations, and
other targets.
Other factors to be considered include the following: (1) South Korea currently
is pursuing a policy of rapproachment and eventual normalization of relations with
North Korea, although it maintains considerable distrust and hostility toward the
country; (2) among the countries with interest in North Korea, China appears to have
the most influence and economic and political interaction, although ties with Russia
still are strong, and South Korea is a major source of economic assistance and trade;
(3) Japan would likely provide a large monetary settlement to Pyongyang in return
for its years of occupation should a peace settlement be reached; (4) the border
between China and North Korea is porous, particularly in the winter when the rivers
are frozen and electricity so scarce that few lights operate at night; (5) centrally
planned, communist economies, that have been operating for several decades create
distortions and consumer dissatisfaction that enable rapid transition to a market
economy once those economies are liberalized; (6) economic reform and the opening
of trade and investment in North Korea would likely induce large increases in
production and economic well-being, but most DPRK production facilities are so
lacking in new machinery and equipment that major investments would be needed
raise them to world standards; and (7) the level of distrust between the United States
and the DPRK is deep and long-standing.
Given U.S. interests and goals, it appears that U.S. strategy may include the
following: (1) convincing the Pyongyang regime that developing nuclear weapons
decreases, not increases, its security; (2) creating tension within the regime over the
allocation of resources between nuclear and conventional weapons and between the
military and civilian economies; (3) weakening the hold by Pyongyang on the daily
lives of its citizens and support of Kim Jong-il by fostering alternative centers of
power, facilitating the transition to a market economy, and increasing information
flows into the country; (4) depriving the central government of revenues derived
from illicit activities; and (5) eliciting greater cooperation from China and Russia
to induce them to apply more pressure on Pyongyang to make suitable concessions
and carry through on commitments deriving from the Six-Party Talks.

---

CRS-39
An economic strategy would be to generate interests in and dependency on
international trade, investment, and greater interaction with the outside world that
could weaken the hold by Pyongyang on the daily lives of citizens and bring the
country more into the globalized world. Such economic liberalization also could
reduce pressures on North Korea to engage in illicit trade in order to cover its trade
deficit and diminish the need for Pyongyang to saber rattle in order to divert
attention from its domestic problems.
Major U.S. policy options, given the above interests, goals, assumptions, and
strategies with respect to the DPRK, include the following.
!
Continue current policies of negotiations plus sanctions (continue
Six-Party Talks, maintain sanctions, and continue or intensify the
Proliferation Security Initiative with its interdiction of illicit trade
in weapons, drugs, counterfeit currency).
!
Intensify negative pressures on the DPRK (tighten economic and
financial sanctions, restrict trade between North Korea and countries
such as China, Japan, South Korea, and Europe, and discourage
foreign investment in the DPRK).
!
Increase engagement to include positive incentives for reform over
the long term (loosen sanctions, encourage reforms, facilitate
foreign investment, promote trade, and allow North Korea to join
the International Monetary Fund and Asian Development Bank).
!
Combine policy options into a package of incentives.
Current U.S. Policy
Current U.S. policy with respect to the DPRK includes (1) diplomatic
engagement through the Six-Party Talks; (2) non-proliferation efforts, including the
Proliferation Security Initiative; (3) international efforts to counter trafficking by
North Korea in illegal drugs, counterfeit currency, or other contraband; (4)
maintenance of U.S. military forces in South Korea, Japan, and elsewhere in the
Pacific as a credible deterrent against North Korean aggression; (5) economic
sanctions and diplomatic isolation; (6) keeping North Korea on the U.S. list of
terrorist states; and (7) keeping North Korea from joining international financial
institutions.
In September 2005, the United States used new authority under the Patriot Act
to name the Banco Delta Asia (BDA) bank in Macau (a territory of China) as a
primary money laundering concern.95 This resulted in special measures being
95 The Department of the Treasury. Treasury Designates Banco Delta Asia as Primary
Money Laundering Concern under USA Patriot Act. Press Release JS-2720. September 15,
2005. See Federal Register, Vol. 70 No. 181, Sept. 20, 2005 (Notices), p. 55214. The
finding asserts that at least one regular North-Korean-front client of BDA was widely
reported to be conducting “numerous illegal activities, including distributing counterfeit
currency and smuggling counterfeit tobacco products” for over a decade. See also
(continued...)

---

CRS-40
proposed that would have excluded the bank from any dealings with the U.S.
financial system.96 The immediate result was a freezing of $25 million in North
Korean accounts at BDA and the triggering of a chain reaction that caused such a run
on the bank that the Macau government had to take over its operations. International
banks, from not only from the United States but from other nations, refused to deal
with even some legitimate North Korea traders. North Koreans tried moving their
international bank accounts to countries such as China and to use bank in Austria and
Switzerland,97 but eventually even China joined in the financial sanctions (after
North Korea conducted ballistic missile and nuclear weapons tests in 2006).
The BDA action seemed to have caused considerable damage to Pyongyang’s
interests. Not only did it stymie international trade, but the frozen accounts
apparently were used by the inner circle of cadre in Pyongyang to buy luxury goods
and other imports. Observers postulate that it was the BDA action and subsequent
similar actions by other nations combined with pressure from China that ultimately
brought the DPRK back to the Six-Party Talks and led to the Six-Party Agreement
of February 13, 2007. As part of this agreement, the United States stated that it
would resolve the Banco Delta issue within 30 days.98
The February 13, 2007, Six-Party Agreement includes a provision that North
Korea is to freeze its nuclear installations at Yongbyon and invite back the
International Atomic Energy Agency to monitor the freeze. In exchange, South
Korea is to provide financing for 50,000 tons of heavy oil to be shipped to the North.
In addition, North Korea is to discuss with the other six parties “a list of all its
nuclear programs, including plutonium extracted from used fuel rods” from the five
megawatt reactor (which North Korea claims to have reprocessed into nuclear
weapons-grade plutonium). The DPRK and the United States also are to start talks
“aimed at resolving bilateral issues and moving toward full diplomatic relations.”
Under the Agreement, North Korea and Japan also were to “start bilateral talks”
toward normalization of relations on the basis of settlement of “outstanding issues
95 (...continued)
Department of the Treasury Press Release of September 15, 2005, (JS-2720) on Treasury
Designation of Banco Delta Asia as a Primary Money Laundering Concern and Treasury
Dept. FINCEN Advisory of December 13, 2005, on Guidelines to Financial Institutions on
the Provision of Banking Services to North Korean Government Agencies and Associated
Front Companies Engaged in Illicit Activities which encourages financial institutions
worldwide to take precautions that they are not used as a conduit for the laundering of
proceeds of DPRK illicit activities.
96 See Federal Register, Vol. 70 No. 181, Sept. 20, 2005 (Notice of Proposed Rulemaking)
p. 55217ff.
97 Major Chinese Banks Refrain From Dealing with N. Korean Firms. Kyodo News, March
13, 2006.
98 King, Neil Jr. And Evan Ramstad. Politics & Economics: What Drove the North Korea
Deal; U.S. Hungered for Diplomatic Victory, Pyongyang for Financial Relief. Wall Street
Journal, February 14, 2007, p. A.4. The Banco Delta action was taken partly under the Bush
Administration’s Illicit Activities Initiative. See David L. Asher, Statement Before the
Subcommittee on Federal Financial Management, Government Information, and
International Security, Senate Homeland Security and Government Affairs Committee, April
25, 2006. David Lague and Donald Greenlees. Squeeze on Banco Delta Asia hit North
Korea where it hurt. International Herald Tribune. January 18, 2007.

---

CRS-41
of concern” (which Japan interprets as requiring a settlement of the issue of North
Korea’s kidnapping of Japanese citizens).
The February 13 Agreement represented a clear change in strategy by the
United States and other parties to the talks. For the first time, the Banco Delta Asia
action was linked by the United States to the Six-Party Talks and nuclear issues. In
essence, the United States agreed to see that the Banco Delta issue was to be settled
before Pyongyang would have to take action to invite International Atomic Energy
Agency inspectors back into the country and to shut down its nuclear plant. For the
DPRK, this meant that the $25 million in frozen funds from Banco Delta accounts
would be released first. The Agreement also implied that a strategy of regime
change appeared to be off the table. The question now is whether the DPRK will live
up to its commitments under the Agreement and what leverage the United States,
China, and other participants have to ensure Pyongyang’s compliance.
What is clear from the experience of the past four years is that Pyongyang’s
stalling and the United States’ refusing to negotiate bilaterally (even under the
umbrella of the Six-Party Talks) provided time for Pyongyang to continue to pursue
its nuclear program. It is now evident that North Korea actually had created a
nuclear bomb.
North Korea claims that the reasons for its nuclear program are to deter an
attack by the United States and to use them if South Korea starts a war or to
devastate Japan to prevent the United States from participating in such a war.99 The
nuclear program also enables it to gain international prestige, to exercise a degree of
hegemony over South Korea, and to extract economic assistance from other
countries. Pyongyang is unlikely to abandon this nuclear program without
significant changes to the underlying reasons for its existence. Its fear of being
attacked has been exacerbated by its inclusion in the “axis of evil,” the Bush doctrine
of preemptive strikes, and the U.S.-led invasion of Iraq.100 Some also consider
Pyongyang’s nuclear program to be a bargaining chip to be traded for economic
assistance and to gain international recognition.
What also can be said about U.S. policy is that except for the Banco Delta Asia
action, economic sanctions have brought few concrete results. The sanctions have
primarily been American. North Korea continues to trade with other countries as
well as to receive humanitarian food aid and limited foreign investment. Even the
United States attempts to keep humanitarian aid separate from political
considerations. The policy questions with respect to sanctions are whether economic
sanctions have actually worsened economic conditions in North Korea and whether
the poor economic conditions have changed policies in Pyongyang.
It appears that despite deep privation and negative growth during the mid-
1990s, the sanctions had little effect on Pyongyang’s behavior in ways that would
achieve U.S. ends. The ruling elite and military have first priority on scarce food and
99 Jane’s Information Group. Armed Forces, Korea, North. Jane’s Sentinel Security
Assessment, March 4, 2003.
100 Laney, James T. and Jason T. Shaplen. “How to Deal With North Korea,” Foreign
Affairs, March/April 2003. p. 20-21.

---

CRS-42
other supplies. The Kim regime allots economic privileges to its insiders. Peasants
may starve, but ranking communist party members live in a separate world of
relative luxury.101 The poor economic conditions also do not appear to have
materially undermined the Kim regime. Experts consider internal dissident forces
too weak and Kim’s control over his military too strong for a domestic coup to
occur.102 Pyongyang has taken halting steps toward opening its economy to
international investment and has allowed more private markets, but these are similar
to policies nearly all centrally planned economies are taking, and China and Russia
have been recommending that North Korea adopt them also.
Irrespective of whether the U.S. economic sanctions worsened North Korea’s
economy, the poor state of the North Korea’s agriculture and industries has indirectly
affected U.S. national interests. It has necessitated humanitarian aid and has
generated a deficit in trade that Pyongyang has attempted to fill by dealing in illegal
drugs and missiles. Food scarcity also has pushed numerous refugees into China and
South Korea.
Following the DPRK’s nuclear test in 2006, the United States took the issue to
the United Nations. The resulting UN Security Council Resolution 1718 (October
14, 2006), called on North Korea to abandon its nuclear and missile programs and
imposed several sanctions. The resolution imposes an arms embargo on North
Korea, bans trade in materials related to ballistic missiles or weapons of mass
destruction, and bars exports of luxury goods to the DPRK. It also freezes funds and
other financial assets owned by people connected with North Korea’s unconventional
weapons program and bans travel by such people. China and Russia supported this
resolution. Japan has curtailed imports from and travel to North Korea, has banned
North Korean ships from entering its ports, and has prohibited exports of 24 luxury
products to the DPRK.
In terms of non-proliferation, the Proliferation Security Initiative now has more
than 60 governments participating. Although aimed at stopping trade in weapons of
mass destruction and their components, the prospect of ships being inspected
complicates North Korean efforts to smuggle illicit weapons, drugs, and counterfeit
currency.103
With respect to North Korea and terrorism, the United States has kept North
Korea on its list of terrorist states primarily because of past terrorist activity. The
blowing up of an airliner with South Korean government officials on board and the
harboring of Japanese Red Army members from the 1960s are the two primary
101 BBC Monitoring, Asia Pacific. Former Bodyguard of North Korean Leader Interviewed,
October 13, 2003, p. 1.
102 The only significant power base that might challenge the regime is the military. Since
Kim Jong-il became Chairman of the National Defence Commission, however, he has
promoted 230 generals. Most of the army’s 1,200-strong general officer corps owe their
allegiance to him. Jane’s Information Group, “Internal Affairs, Korea, North,” Jane’s
Sentinel Security Assessment. June 10, 2003.
103 The White House. Proliferation Security Initiative, Fact Sheet. September 4, 2003. U.S.
Department of State. U.S. Notes First Anniversary of Proliferation Security Initiative. Press
Release, June 1, 2004.

---

CRS-43
reasons for keeping the DPRK on the terrorist list. The United States apparently has
assured Japan that North Korea will remain on the terrorist list until it completely
resolves the kidnapping issue with Japan. Being on this list requires the United
States to impose certain trade restrictions.
The Six-Party Talks
Current engagement with North Korea is being conducted under the Six-Party
Talks plus bilateral discussions between Pyongyang and other nations. The Talks
include the United States, DPRK, China, Japan, South Korea, and Russia. This
brings all major players to the table, exposes China and Russia to North Korean
obstinacy, enables China and Russia to exert pressure on Pyongyang, and includes
Japan and South Korea who have direct interests in a peaceful resolution of the
problem and are likely to be the major providers of aid to the DPRK. (For discussion
of the talks, see CRS Report RL33590, North Korea’s Nuclear Weapons
Development and Diplomacy, and CRS Report RL33567, Korea-U.S. Relations:
Issues for Congress, both by Larry Niksch.)
Table 11 summarizes the major negotiating priorities and bargaining chips for
each side in the Six-Party Talks. Any policy package would have to address at least
some of the priorities of each nation.
The highest priority for the United States, Japan, and Russia reportedly is for
North Korea to scrap its nuclear weapons program in a manner that is verifiable.
Japan also is concerned about North Korean missiles (which have been fired over
Japan) and a full accounting for the abduction of its citizens. In addition, the United
States, China, and Japan seek a stop to weapons proliferation, while Japan also seeks
normalization of relations with the DPRK, and South Korea seeks a framework for
rapprochement, possible reunification with the North, less military tension along the
demilitarized zone (DMZ), and access to cheap labor and markets in the North.
Pyongyang’s primary goals appear to include (1) preservation of communist
rule under Kim Jong-il, (2) obtaining a security guarantee that would preclude a
possible preemptive attack by the United States or its allies, (4) maintaining key
elements of its nuclear weapons programs, (3) establishing diplomatic relations with
the United States and Japan, (4) reunification with the South on its own terms, and
(5) obtaining economic assistance for its ailing economy while maintaining its juche
philosophy. The Kim regime appears to be operating under the assumption that
because of its designation as a member of the “axis of evil” by the Bush
Administration, it has a high probability of being targeted for military action based
on the Iraq precedent.
A risk of any policy package, such as the February 13, 2007 Agreement, is that
North Korea might not scrap its nuclear program once it receives the Banco Delta
funds and energy aid starts to flow again. Some surmise that Kim Jong-il is still
smarting at being characterized as “evil” and is unlikely to allow the Bush
Administration to claim “victory” in shutting down the DPRK’s nuclear program.
If Pyongyang does not follow through on the Agreement, tensions could escalate,

---

CRS-44
and punitive measures, including military action, could be considered.104 Absent
those extreme measures, the world may have to learn to live with a nuclear-armed
North Korea much as it has learned to live with a nuclear-armed Pakistan and India,
and Japan and South Korea would have to consider whether to develop nuclear
capability themselves. Another risk of providing a policy package that includes real
incentives could be that the United States would be perceived as being blackmailed
and giving away too much to a dictator who regularly violates the human rights of
his people.
Table 11. Major Priorities and Bargaining Chips by Country in
the Six-Party Talks with North Korea
Country
Priority
Bargaining Chips
United
Complete, verifiable, and irrevocable
Guarantee security and
States
scrapping of nuclear weapons; non-
regime, economic aid,
proliferation
normalized diplomatic and
trade relations
North
Guarantee security and regime; establish
Scrap nuclear weapons and
Korea
diplomatic relations with the U.S. and
missiles, reduce tensions
Japan; reunification with South Korea on
along DMZ
own terms
South
Set framework for peaceful resolution and
Economic support, energy,
Korea
prosperity on the peninsula; reunification;
business investment
access to North Korean labor and markets,
non-nuclear Korean peninsula
Japan
Scrap nuclear weapons program and
Normalized diplomatic
missiles; resolve abductions of Japanese
relations, economic support
citizens issue
China
Non-nuclear Korean peninsula, non-
Economic support, alliance
proliferation; continued influence on
support
peninsula, weakening U.S. alliance with
Japan and with South Korea
Russia
Scrap N. Korean nuclear weapons; promote
Buffer diplomacy, energy
stability in N.E. Asia
Source: Adapted from: The Seoul Economic Daily, 22 August 2003, cited in Hong Soon-Jick, “North
Korean Nuclear Crisis: Prospects and Policy Directions,” East Asian Review, Vol. 15, No. 3, Autumn
2003, p. 31.
The costs of a diplomatic solution to tensions with North Korea would be
relatively small compared with a nuclear arms race in Northeast Asia or a preemptive
strike on North Korea by the United States. Opening trade and diplomatic relations
would be of relatively low cost for the United States, but this would require
resolution of certain issues.
104 See OPLAN 5026 - Air Strikes. [http://www.globalsecurity.org/military/ops/
oplan-5026.htm]

---

CRS-45
Possible Economic Incentives
The February 13 Six-Party Agreement includes various economic incentives for
the DPRK. The short-term incentives include providing fuel and releasing the Banco
Delta funds, while long-term incentives include normalization of economic relations,
removing the DPRK from the U.S. terrorist list, and allowing North Korea to join
multilateral financial institutions, such as the Asian Development Bank and
International Monetary Fund. The list of potential economic incentives, include the
following:
Normalizing Diplomatic Relations. Normalization of diplomatic relations
with the DPRK would apply to the United States, Japan, and South Korea. North
Korea already has diplomatic relations with China, Russia, and the European Union
(including an embassy in London). For Japan, the DPRK would have to resolve
certain issues, including a full accounting of the status of kidnapped Japanese
citizens, North Korea’s missile firings over Japan, and incursions by suspected
DPRK espionage and drug-running ships into Japanese waters. Upon conclusion of
these normalization talks, Japan is likely to offer $5 billion to $10 billion to North
Korea in compensation for its occupation.105
Normalizing diplomatic relations allows countries to communicate with each
other in a more direct fashion, enables diplomats to gather information directly, and
provides more interaction on a personal level. Normalized relations can help to
overcome the Pyongyang propaganda machine both within the DPRK and on the
world stage. Normalization, however, can imply that the United States is willing to
tolerate conditions in North Korea. This may be unacceptable to some. Absent
normalized relations, Washington could seek a relationship similar to that with Cuba.
Even without diplomatic ties, the U.S. mission in Havana is attached to that of
Switzerland and maintains a staff similar in size to a regular embassy. (North Korea
has been a member of the United Nations since 1991 and has representatives in New
York.) Japan has initiated talks with Pyongyang that could lead to normalized
relations, and South Korea has been seeking diplomatic ties and possibly some form
of reunification in the future. In 2007, bilateral talks between Japan and the DPRK
on normalization were stymied by the abduction issue.
Negotiating a Trade Agreement. The United States could begin talks with
the DPRK on a trade agreement which would cover goods, services, and investments
and could be modeled after the 2001 bilateral trade agreement concluded between
the United States and the Socialist Republic of Vietnam.106 Upon implementation
of the trade agreement, each country would accord the other normal trade relations
(most favored nation) status. The immediate effect would be to allow North Korean
exports to the United States to enter at the lower rates of duty accorded to nearly all
other nations of the world. The trade agreement also could cover investment and
other U.S. interests.
105 See CRS Report RL32161, Japan-North Korea Relations: Selected Issues, by Mark
Manyin.
106 The White House, George W. Bush. “Presidential Proclamation: To Implement the
Agreement Between the U.S. and Socialist Republic of Vietnam on Trade Relations,” June
1, 2001.

---

CRS-46
While the DPRK’s market currently is small, eventually it could re-industrialize
and become a larger economic player in the region. Liberalization of North Korean
trade and investment relations, moreover, can work through the economy in the same
way that it did in China and Russia by exposing the public to the benefits of
increased wealth. The major negative to establishing trade with North Korea is that,
unless it is part of a larger package that includes other concessions, the United States
could be viewed as exchanging an important bargaining chip for minimal gain.
Easing U.S. Sanctions. The United States could ease economic sanctions
on North Korea if the country resolves the issues that caused the sanctions to be
imposed initially. Since North Korea’s other trading partners have more liberal trade
with North Korea, it is mainly American companies and traders that are impacted by
the sanctions. Pyongyang can spend its available foreign exchange in any of a
number of world markets — in China, Japan (to an extent), South Korea, Europe, or
elsewhere. Moreover, as North Korea opens its economy, U.S. businesses would be
able to decide whether or not to invest there based on their own economic interests
and not because they are precluded from doing so by U.S. law.
Allowing the DPRK to Join International Financial Institutions (IFIs).
The United States could stop blocking the DPRK from joining the major IFIs,
particularly the Asian Development Bank, World Bank, and International Monetary
Fund. Pyongyang is particularly interested in joining the Asian Development Bank,
but IFI procedures require membership first in the International Monetary Fund. The
IMF requires certain economic data which the World Bank or Asia Development
Bank needs to evaluate projects and loan requests. Membership in IFIs requires that
a country establish data gathering and reporting mechanisms as well as open their
country to visits, surveys, or assessments by the IFI. As an incentive, a special fund
could be set up in the World Bank or Asian Development Bank to assist North Korea
in its economic transition. This fund could be financed by Japan or South Korea in
conjunction with their normalization of relations with the DPRK.
Removing the DPRK from the Terrorism List. The United States, Japan,
and the DPRK could commence negotiations to remove the DPRK from the U.S.
State Department’s list of nations that support or sponsor international terrorism.
Removal from the list would require Congressional concurrence. Once off this list,
North Korea would become eligible for U.S. foreign aid, loans from the U.S. Export-
Import Bank, loans from international financial organizations in which it has
membership, and an easing of U.S. export control requirements. In order to be
removed from this list, it appears that the DPRK would have to do the following: (1)
issue a written guarantee that it no longer is engaged in terrorism; (2) provide
evidence that it has not engaged in any terrorist act in the past year; (3) join
international anti-terrorism agreements; and (4) address issues of past support of
terrorism (particularly the harboring of Japanese Red Army terrorists and kidnapping
of Japanese citizens).107
107 See CRS Report RL33567, Korea-U.S. Relations: Issues for Congress, by Larry A.
Niksch.

---

CRS-47
Fuel and Food Aid
In the Six-Party Talks, since the DPRK appears to be most concerned with
obtaining fuel and food aid in exchange for concessions on its nuclear program, the
United States could provide assistance in any of a variety of forms. The February
13, 2007 Agreement provides for some fuel oil to be sent to North Korea and to be
financed by South Korea.
Legislative Action
Major congressional action with respect to security aspects of U.S.-DPRK
relations is included in CRS Report RL33567, Korea-U.S. Relations: Issues for
Congress, and in CRS Report RL33590, North Korea’s Nuclear Weapons
Development and Diplomacy, both by Larry A. Niksch.
Brief Chronology
!
March 19, 2007. The Six-Party Talks resumed in Beijing with the
DPRK insisting that the $25 million frozen in BDA accounts in
Macau be transferred to DPRK accounts in China before the talks
could proceed.
!
March 14, 2007. Treasury finalized its rule against Banco Delta
Asia in Macau, barring the bank from accessing the U.S. financial
system.
!
October 13, 2007. The countries in the Six-Party Talks announced
an agreement in which North Korea halts its nuclear program in
exchange for energy assistance and diplomatic recognition.
!
October 14, 2006. The UN Security Council adopted Resolution
1718 calling for all UN members to take wide-ranging economic
and diplomatic sanctions against North Korea.
!
October 10, 2006. Japan announced a ban on imports from North
Korea, on their ships entering Japanese ports, and on entry into
Japan in principle by North Koreans.
!
October 9, 2006. Pyongyang announced that it had conducted an
underground nuclear test.
!
January 20, 2006. North Korea stated that it would not return to the
Six-Party Talks until the United States lifted its financial sanctions
on Banco Delta Asia and on eight North Korean entities for
allegedly proliferating weapons of mass destruction.
!
January 10-18, 2006. Kim Jong-il visited southern China and
Beijing ostensibly to learn how China can help North Korea

---

CRS-48
improve its economy. In Beijing, the two countries discussed the
Six-Party Talks dealing with North Korea’s nuclear program.
!
January 1, 2006. The U.N. World Food Program, which was
helping to feed one-third of North Korea’s 22 million people as
recently as August 2005, ended all feeding programs at the request
of the North Korea’s government.
!
Fall 2005. North Korea reportedly revived rationing and rolled back
market reforms (closed some private food markets).
!
October 21, 2005. Pursuant to Executive Order 13382, the U.S.
Treasury designated eight North Korean entities as proliferators of
weapons of mass destruction and their delivery vehicles. The action
prohibits all transactions between the designated entities and any
U.S. person and freezes any assets the entities may have under U.S.
jurisdiction.
!
September 15, 2005. The U.S. Treasury designated Banco Delta
Asia SARL as a “primary money laundering concern” under Section
311 of the Patriot Act because it represents an unacceptable risk of
money laundering and other financial crimes. Treasury stated that
“Banco Delta Asia has been a willing pawn for the North Korean
government to engage in corrupt financial activities through
Macau....”108
108 U.S. Department of the Treasury. Treasury Designates Banco Delta Asia as Primary
Money Laundering Concern under USA PATRIOT Act. Press Release JS-2720, September
15, 2005.

---