North Korea trade falls for first time in decade - report

A North Korean woman carries water she collected from the Yalu River in the North Korean city of Hyesan, which borders China's Changbai county, April 6, 2009.

SEOUL (Reuters) - North Korea's international trade dropped last year for the first time in more than a decade after the destitute state was hit by U.N. sanctions to punish it for a nuclear test in May, a South Korean think tank said.

The economic woes, made worse by a botched currency reform late last year, have been putting pressure on the North to return to stalled nuclear disarmament talks where it can win aid for decreasing the security threat is poses to the region, analysts said.

The report by the state-run Korea Development Institute made available on Wednesday said the largest impact came from a sharp decline in trade with China, the North's biggest benefactor that its leader is expected to visit in coming weeks.

Trade with South Korea and the European Union was also down, and the combined decline in trade with the three parties that account for nearly 90 percent of the North's trade points to an overall decline of at least 5 percent in the past year, KDI said in the report.

"The decline in the North's imports indicates a foreign exchange shortage in the North," it said, adding the trade decline was the first since 1998.

The North had $3.8 billion in trade in 2008, according to the South's Bank of Korea, with China accounting for about half.

The North's main exports are weapons and minerals and its main imports are oil, machinery and grain, according to the U.S. Central Intelligence Agency's World Factbook.

The U.N. sanctions were aimed at cutting into the North's illicit arms trade. They also increased apprehension of already skittish investors of doing business with the mercurial state.

The North's abrupt currency move was aimed at cutting into the power of a burgeoning merchant class. It destabilised its won currency, sparked rare social unrest and slowed the flow of consumer goods from China to a trickle, various reports said.

The KDI report said, however, that overall trade with China appeared to be mostly unaffected by the currency move.

The North later eased some curbs placed on black market trading, rolling back part of the currency move after an impoverished public had an even more difficult time buying necessities, the South's spy agency said last month.

(Reporting by Jack Kim, Editing by Jon Herskovitz and Jeremy Laurence)