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How China's pivot on carbon is turning North Korea into a suitmaker

China coal
Ed Jones | AFP | Getty Images

With China looking to cut carbon emissions ahead of an international climate session next year in Paris, one neighboring country already is pivoting to ensure that China's falling coal consumption doesn't hurt its economy: North Korea.

The total value of North Korean coal shipments into China is down 23 percent for the first half of 2014 compared to a year ago, according to recent figures from "North Korea: Witness to Transformation," a widely followed blog that tracks North Korea-related developments. That's an annualized $340 million hit to the North.

But while the value of imported coal has retreated, North Korean-China trade overall is stable as North Korea exports more goods under the broad category of textiles. The grouping includes North Korean-made clothes and accessories exported to China, South Korea and third country markets.

And North Korea isn't an isolated case. China has seen a decline in both the dollar value and physical volume of its total world coal imports from January through August 2014. As China shifts, so do regional economies.

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The upshot for North Korea? Give China what it wants.

"During the first six months of the year, there has been a big expansion of these North Korean textile exports to China," said Kevin Stahler, research analyst for the Peterson Institute for International Economics, based in Washington, D.C. Exported, finished products include jackets and suits.

The fact that North Korea—more commonly associated with famine and nuclear weapons—even has resources to share may be surprising. But the North has been exporting coal and other resources for years including metals, rare earth minerals and fish and crustaceans. And China remains North Korea's chief diplomatic ally and largest trading partner, followed to a lesser extent by South Korea and Russia.

In 2013, North Korean trade totaled $8.6 billion, with 77.4 percent of that amount stemming from China, which accounted for $6.7 billion. That's according to estimates tracked by the "North Korea: Witness" blog.

"(North Korea is no longer) two persons and a fax machine." -U.N. report

North Korean trade basically allows the regime to stay afloat and generate revenue despite international sanctions, designed to pressure the North into nuclear disarmament. Despite such punitive measures, the rogue state has actually gotten stealth about how to bypass international checks and balances, and uses a vast, regional trading network to generate cash.

The regime is experienced in using foreign-based individuals and shell companies—involved in legitimate business—to mask illicit activities linked to sourcing weapons of mass destruction, according to a United Nation report released this March. North Korea's trading activities, it turns out, are quite evolved and tactical.

The North is no longer "two persons and a fax machine," according to a U.N. panel.

North Korean coal is special

North Korean coal shipments to China account for roughly half of total North Korean exports to China. And North Korean coal—anthracite—is coveted.

Anthracite is one of the hardest, cleanest-burning types of coal compared to more commonly known bituminous, soft coal. The North's higher quality anthracite can also be shipped a few hundred kilometers across the water west to eastern China's Shandong provinceChina's largest provincial coal consumer.

Actual physical quantities of coal volume to China from North Korea are roughly flat this year. The North has contributed to 5 percent of China's total coal imports so far this year, according to Alex Whitworth, an expert on China energy for IHS, a global forecaster. But even this flat trend is telling, as North Korean-China coal quantity trade follows several years of big gains

Broadly, China's coal demand is forecast to grow for at least another decade, with most of those gains in inland regions. But China is shifting its environmental policy—or at least cleaning up the air for wealthier regions, and pushing the bad stuff inland. China has been reducing air pollution, especially in coastal and wealthy areas, said Beijing-based Whitworth in an email to CNBC.

Since 2013, tough Chinese policies have limited new heavy industries and coal-fired power plants, and shut down small-scale coal boilers and excess production capacity. The net effect has been accelerated coal demand inland, where coal prices are cheaper by as much as half compared to coastal prices.

All eyes now are on China and the U.S.—the world's two biggest carbon emitters—heading into an international climate session in 2015. It has been some two decades since the world's first climate change treaty was reached, the 1997 Kyoto Protocol. Along with Chinese President Xi Jinping, President Barack Obama this week also committed to targets for cutting carbon emissions.

Already China's energy-intensive industrial output is gradually slowing, as the services sector gains a foothold.

China's services-related output accounted for the largest contribution to real GDP growth in seven of the last eight quarters, according to Brian Jackson, senior economist for IHS Economics. Looking ahead, IHS forecasts services to continue to gain share in the economy, rising to about 50 percent of output over the next decade compared to about 46 percent now, said Beijing-based Jackson in an email to CNBC.

North Korea wants to make you a suit

A North Korean woman stretches a string of yarn at the Kim Jong Suk Pyongyang textile factory in North Korea. It's the country's largest textile factory with 8,500 workers.
Wong Maye-E | AP
A North Korean woman stretches a string of yarn at the Kim Jong Suk Pyongyang textile factory in North Korea. It's the country's largest textile factory with 8,500 workers.

Largely fueled by lower labor costs in North Korea and rising wages elsewhere, China has been exporting more raw materials like zippers and fibers including wool and cotton into the North. Those materials in turn are manufactured shipped back into China as finished products. In one North Korean province, as an example, pay there can be roughly half of Chinese wages.

North Korean exports of apparel and accessories into China expanded 43 percent from January 2013 to June 2013 to $326 million, according to recent data compiled by the blog "Witness to Transformation."

Most trade in general including textiles goes through the Kaesong industrial park, a unique collection of South Korean-built factories with North Korean workers. A sort of microcosm of reunification, the complex is located near the North Korean-South Korean border.

And as economies like China move up the manufacturing food chain to smartphones from apparel, North Korea wants to climb that ladder too it seems. Said Stahler of the Peterson Institute for International Economics: "I would not be surprised to see further North Korean expansion in the textile trade."

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