N.Korea's weak trade, currency hint at more arms sales

By Lucy Hornby - Analysis

BEIJING (Reuters) - A drop in trade and the value of North Korea's currency has cut the regime's access to foreign exchange, raising the risk Pyongyang will increase the sale of its military know-how abroad despite tighter U.N. sanctions.

North Korea's economy has shrunk since Kim Jong-il took power in 1994, and analysts say a recent nuclear test and a spate of missile launches could be an attempt to distract the population from their economic distress as he tries to set up his youngest son as his successor.

"We are seeing a downturn in trade with both South Korea as things deteriorate with Kumgang and Kaesong as well as with China," said Stephan Haggard at the University of California, San Diego, referring to a resort and industrial park located in the North but run by the South.

"Given the fact that North Korea has been facing a more and more hostile external environment, we can expect more incentives to engage in missile sales and other illicit activities in order to earn foreign exchange."

The United States and others have said they suspect North Korea of selling arms, missile parts and proliferating nuclear expertise in violation of earlier U.N. sanctions. They suspect North Korea of also selling illegal drugs, as well as counterfeit U.S. dollars and cigarettes, in order to earn hard currency.

After the May 25 nuclear test, the U.N. Security Council imposed sanctions meant to stamp out arms exports.

The resolution authorized U.N. member states to also inspect North Korean sea, air and land cargo, requiring them to seize and destroy shipped goods that violate the sanctions.

In addition, Washington could target banks suspected of aiding the North in illicit activity. A similar move in 2005 ended almost all of the North's international financial transactions.

Cho Myung-chul, an expert on North Korea's economy at the Korea Institute for International Economic Policy in Seoul, said the destitute state would strive to survive on its own.

"This means they will invest more in their military power and their private businesses, to try to boost their independence and ride out" the international restrictions, Cho said.

"North Korea will endlessly try to export arms. They are unable to shake this thought from their minds because exporting arms is a very profitable business compared to other goods."

BORDER TRADE

At Dandong on the Chinese-Korean border, the number of trucks making the crossing recovered to nearly 100 a day last month, locals said, as commodity prices improved after a dismal winter.

That trade could suffer if China rigorously inspects trucks, trains or passengers, which Chinese analysts said it is more likely to do than risk a confrontation over ship inspections.

In recent years, North Korea has become more economically open, particularly to Chinese trade and investment. Most interactions involve state-owned firms or the powerful military.