Sino-North Korean deal to provide a timely boost to northeast China's supply chain

-----By Cameron Wilson

China's industrial northeast has historically been one of the engine rooms of the country's manufacturing powerbase. Struggling through the transition from a planned, communist style economy to one governed by market forces, the area was dominated by state owned heavy industry and given the un.attering moniker of the "Rust Belt."

As new technology made some of the bigger plants obsolete, the region lost its edge as an industrial base. But two years ago, the government set about giving the area a new coat of paint with its "Revitalize the Northeast" campaign aimed at bringing the area up to speed with the rest of modern China. Now, a unique deal with one of the world's most reclusive countries could bring fresh prosperity to the region. A radical alteration to the supply chain in the Northeast, in the shape of a 50-year lease on the North Korean port of Rajin, will slash transport distances and costs to the lucrative Japanese market.

Securing Rajin

Liaoning, the most southerly of the northeastern provinces, enjoys an extensive coastline and its major port, Dalian, speckled with numerous oil re.neries, is the largest petroleum port in China, and the third largest overall, with 40 percent of China's petroleum reserve in the Northeast. But more importantly, Dalian is China's window on Japan. In recent years, the city has become a major center for Japanese outsourcing, but its status as a port to serve the entire northeast region is problematic, especially when shipping to its major customer, Japan.

One thing quite literally stands in Dalian's way . the Korean Peninsula. The Northeast suffers from a logistics problem due to the fact that two of the three provinces that make up the region . Jilin and Heilongjiang . are landlocked, making exporting goods more dif.cult. Shipments bound for Japan must travel all the way by road or rail and then sail around the Korean Peninsula before reaching the Land of the Rising Sun.

According to Korean and Chinese news sources, the new deal was signed in September and will see the Chinese border city of Hunchun, which lies about 80 kilometers inland on the Tumen River, have exclusive rights to access Rajin port for the next 50 years. China will also establish a 5-10 square kilometer industrial zone in the North Korean city and construct a 67-kilometer highway linking Rajin to Hunchun. Additionally, North Korean officials agreed to an investment deal along with the port deal, which their Jilin provincial government counterparts signed to ease cross-border trade.

Korean officials were especially keen to clinch the deal to improve the Rajin-Sonbong Economic and Trade Zone in the northeastern part of the Democratic People's Republic of Korea (DPRK). The zone was established in 1991 in an effort to attract foreign investment and encourage international trade and covers a roughly triangular area of some 746 square kilometers along the Chinese and Russian bor-ders. The zone occupies a strategic area with potentially key land and sea transport routes between China, Russia, South Korea and Japan. Its use-fulness as a logistics hub is boosted by its relative proximity to the western ter-minus of the Trans-Siberian Railway in Vladivostok . a high-volume freight line linking the Far East with European Russia.

With this in mind, it's little wonder that the Chinese have been so eager to get their hands on Rajin, which also happens to be an ice-free port, an important factor in an area known for its severe winters. The agreement comes on the back of failed negotiations to secure the use of the Russian ports of Zarubino or Posyet, both just over the Chinese border, because the Kremlin feared China had territorial desires and secretly planned to make any lease of their ports a permanent feature of the Northeast Asian map.

The North Korean port deal and its implica-tions for China's rustbelt were discussed at a September logistics forum at Shanghai Jiao Tong University. Experts said that securing an east coast port was essential, as Dalian was literally sitting at the top of a logistics bottleneck for China's northeastern provinces. Speaking at the forum, China Economic Quarterly managing edi-tor Arthur Kroeber said that Dalian officials had designs on making their city a major center for the surrounding region. "Dalian is a prosperous city with manu-facturing and many services which are oriented towards the Japanese market," he said. "There is a hope that Dalian can be a major logistical hub in Northeast Asia after some major port upgrades, including a special-ized automobile handling port with the help of Japanese investment."

The demand for more comprehensive links in the Northeast is unavoidable. Whereas Heilongjiang and Jilin provinces are land-locked, Dalian and its peninsula environs suffer from the exact opposite problem - having too much access to the sea, almost to the point of being completely surrounded by water. Kroeber said "Dalian is on this long strip of land which juts out from Liaoning province, and it's very difficult to have the same kind of highly concentrated networks developing in that area. It's one thing to have the infrastructure in place to make a supply chain possible - it's another to have the right geography."

The lack of transport links is not the only factor hindering Dalian in its quest to become a more dominant port. The need for a new connection for the Northeast, in the shape of the North Korean port, is highlighted by demographic factors stemming from Dalian's location, which lacks proximity to other production centers. "I think there are some obstacles to the development of Dalian as a logistics hub," Kroeber said. "Because, unlike Shanghai and other ports in eastern China, Dalian does not have a large and obvious catchment area for an industrial base, whereas Shanghai commands the Yangtze River Delta area which is a relatively compact area, similar to the Guangdong area."

Kroeber said he believes that although Dalian is a major port, it offers little opportunity for expansion in terms of import and export volume, and that it is more likely that existing logistics centers would be developed, rather than creating new centers. "I'm a little bit skeptical that the Northeast will emerge as the third major base of supply networks in China. What we are likely to see is an extension of the greater Shanghai base."

But that still leaves the Northeast with an elongated supply chain to reach its Japanese market. Paul French, publishing and marketing director of Access Asia, an Asian affairs clearinghouse, said that political factors resulting in part from Dalian's strong ties with Beijing might hamper the development of the link to Rajin Port, due 48 EuroBiz November 2005EuroBiz November 2005 49to Dalian's ambition to raise its profile. "Dalian reminds me of Shanghai five or 10 years ago," he said. "It has a lot of political power at the moment and is able to cluster a lot of government investment as Shanghai did."

Serious intentions

Last December, Dalian announced plans to develop an international shipping center for northeast Asia. The new center would handle 80 million tons of petroleum, 20 million tons of ore and ten million TEUs per annum, by 2010. But no matter how much money the authorities invest in Dalian port, they cannot physically move it to a more advantageous position for the rest of the Northeast.

French is among many who say Rajin port is the best logistical option, but warned that it might not happen, though a deal has been done. "When these plans are announced sometimes they happen sometimes they don't, and when you are talking about North Korea, 99 times out of 100 the plans don't happen," he said. "I think it is a logical step though, and Dalian will .ght it all the way."

The Chinese government has already spent billions on the soon-to-open Yangshan Port in Shanghai, to which all lines currently shipping from the Yangtze River area to Europe will be forced to move, much to the chagrin of many of the operators. Conversely, were the Rajin Port deal to come to fruition, it is already apparent that operators would line up to take advantage of the considerably shorter route to Japan. Inarguably, if Yangshan can be built, then surely Rajin could be opened to China with the demand for such a facility already in place.

With Rajin as China's shortcut to the east, perhaps the humble world of logistics, with its straightforward and practical need to access the sea, might just be a small step towards the opening up of future markets in one of the last bastions of communism, North Korea.

Rajin deal: key elements

China's 50 year deal with North Korea gives the Chinese border city of Hunchun exclusive rights over the North Korean port of Rajin;
Hunchun will establish a 5-10 kilometer industrial zone in Rajin and build a 67-kilometer highway between the two cities;
China will transport coking coal to Rajin for export to Japan, where previ-ously it shipped the coal from Dalian port to the west;
The Tumen River development program, a 10-year program begun in 1995 to improve the Rajin area's economic progress, will continue for another decade and incorporate China's three Northeastern provinces and Inner Mongolia, the Rason Economic and Trade Zone of DPRK, eastern provinces of Mongolia, eastern port cities in South Korea and part of the Primorsky territory of Russia;

Unstated but presumably also a key element is closer monitoring of the Sino-North Korean border, to reduce the winter exodus into China, which usually centers on China's Hunchun region.

North Korea and China: lips and teeth

Relations between Pyongyang and Beijing started the 1950s well thanks to China's support for North Korea during the Korean War (which ended 1953), and also to their similar ideological leanings in the early Cold War years.

In 1961, a new bilateral coopera-tion treaty was signed which described North Korea and China as being like lips and teeth" respectively. Remove the lips and the teeth will freeze, it was said.

During China's Cultural Revolution of the 1960s and 1970s, relations cooled somewhat and North Korea began to drift towards the Soviet Union, while still retaining cordial relations with China.

By the mid-1970s, China's relation-ship with the United States and the West generally was starting to thaw, while North Korea was still stuck in the diplomatic isolation that resulted from the Korean War. But in September 1978, just before formal diplomatic relations with the United States were established, China's premier leader Deng Xiaoping visited Pyongyang.

China has remained one of North Korea's main supporters ever since, supplying, amongst other things, fuel and grain on preferential terms. When the Soviet Union passed into history in the early 1990s, aid from Mos-cow to Pyongyang virtually dried up, and China's support for North Korea became even more crucial.

North Korea's leader Kim Jong-Il, the son of the Great Leader Kim Il-sung, has visited China on several occasions in the past 20 years, and North Korea has done some limited experiments on economic zones and foreign investment to try to emulate the wealth creation which China has accomplished so successfully in the past quarter century.

Recently, China has led the negotiations on resolving the dispute over the North Korean nuclear program.