There is a very well-established literature on assurance in international relations, going all the way back to Charles Osgood’s 1962 classic An Alternative to War or Surrender. Andy Kydd at Wisconsin is my favorite guru on the subject; his book, Trust and Mistrust in International Relations, published by Princeton in 2007 is an excellent primer. Signaling models with asymmetric information are at the core of this work. When trust is lacking, actors who would like to assure their counterparts can do so by sending diplomatic signals, but with two crucial caveats. First, the signals must be adequately costly that they would not be sent by an untrustworthy type; small gestures or merely verbal commitments that involve no risk will be dismissed as “cheap talk.” Second, trustworthy types actually have to take more risks than untrustworthy types; indeed, it is precisely by taking such risks that the trustworthy can distinguish themselves from the untrustworthy.
The theory perfectly captures the dilemmas that North Korea is facing in the talks over Kaesong that collapsed at the end of last week. The assurances on offer from the North mark a substantial rhetorical departure, and certainly signaled Pyongyang’s eagerness to get the cash flow rolling again; North Korean statements even contained a whiff of contrition. But the signals were far from costly. North Korea is clinging to its story that the closure of the complex was justified by events and seems unwilling to address the question of the losses suffered by South Korean firms, the full extent of which are not even yet known. In effect, the North Korean approach is “let bygones be bygones.”
Entering the 6th working level meeting last week, North and South had already agreed on the ultimate goal of reopening the complex (July 7th official document in Korean, Hankyoreh report in English). The agreement suggested a two-step process, with first-phase actions to include:
- allowing South Korean company personnel to visit Kaesong, assess conditions and conduct maintenance;
- letting South Korean companies bring back finished products, raw materials and, following “relevant procedures,” capital equipment;
- guaranteeing the personal safety, passage and communication for the South Korean company employees entering Kaesong.
These steps would set the stage for resuming the operation of the complex as follow-up talks considered on how to “normalize” its operation and prevent it from being shut down in the future. But the North was clearly hoping that the “normalization” talks would lead quickly to a package deal.
This preliminary agreement seemed to favor the South in several respects; the North was taking at least some risks. Except for completely immobile fixed investments—which were in any case largely made when the complex was built–South Korean firms were given the option to exit with their capital equipment. Particularly given the fact that Kaesong firms have been granted access to emergency preferential loans from the Inter-Korean Cooperation Fund, some might well decide to cut their losses; we have reported on the strategic role of this insurance in the past and also the risks of moral hazard that arise.
The sixth round of talks ultimately broke down, however, and media reports (Hankyoreh here) suggested that the issues were not limited to “normalization” but to Southern demands for a clear statement of responsibility and compensation for losses.
The Northern delegation seemed particularly intent on telling its side of the story. When the talks collapsed, the North Korean delegation barged into the South Korean press room and read out a prepared statement while a staff member distributed copies of North Korea’s draft agreement and the changes that had been made in the course of the negotiations (Hankyoreh). Subsequent KCNA coverage—reproduced in full below–claimed that the North was willing to make concessions on virtually all issues of interest to the South including “the issue of refraining from all acts of hindering the operation in the zone so that it may run on a normal basis unaffected by the situation under whatever circumstances, the issue of protecting safety of the personnel entering the zone and the properties invested by south Korean businessmen, and the issue of settling communications, passage and customs clearance…”
The KCNA coverage also suggested a series of institutional proposals: willingness to open mil-mil talks on issues of relevance to the zone; reopening the north-south economic cooperation consultative office; revitalizing the joint management committee with functional subcommittees on the issues of joint concern.
Of course, the North also had its wish list for the future, including “ensuring world-level business activities and developing the zone into an economic zone with international competitive edge.” But nodding at such aspirational statements would constitute cheap talk on the part of the South; Seoul is not going to undertake any commitments with respect to the zone until it is assured that existing operations can be resumed.
Where did things go wrong? First, North Korea’s formula for handling the past included an enervating face-saving feature: language that would suggest that both sides needed to draw lessons from the closure of the park and assure that it would not happen again; essentially, “let bygones be bygones.” The North Korean spokesman claimed it had withdrawn workers because of insulting coverage of the project as a “cash box” for the regime as well as South Korean Defense Minister Kim Gwan-jin’s remarks about “an emergency at Kaesong.” (Those comments might have been incautious, but they reflected a legitimate concern that South Korean managers might be held hostage). According to an MOU press release (in Korean) that belatedly told the South’s side of the story, the North wanted language that read as follows:
“…the South side shall guarantee not to make illicit political statements or military threats targeting the industrial complex and the North side shall guarantee not to close down the complex or pull out its workers as long as such problems do not occur.”
But both sides were not responsible for the closure of the KIC; it was the North that decided to link activity in the zone to the broader North-South game by denying managers access and pulling its workers out. The South initially did everything in its power to cajole the KIC back into operation. The demand for an apology on the part of some may be a poison pill urged by those who have no interest in reopening the zone; the Park administration has not asked for an apology per se as far as we can tell. But an apology is not really the issue; the question is whether Pyongyang will acknowledge its responsibility for what occurred and promise that they will not do it again.
Second, the North Korean conception of the time value of money showed classic blackmail logic. The North urged Seoul to “take into consideration the earnest requests of the south side’s businessmen to resume the zone so that they can reduce business damage as much as possible…” But wait a second; the business damage was imposed on the South Korean firms by Pyongyang’s closure of the zone. Those losses are now estimated at nearly $1 billion. Moreover, the North simply could not refrain from threats: the North Koreans threatened that it could close the overland route to Kaesong and re-position military troops there again.
The approach to the losses of the Southern firms was precisely the same as the approach to the history of the conflict. Assertions that the North should compensate for damages done was “uncouth.” Again, “let bygones be bygones.” Who, exactly, does the North believe should bear the losses associated with its actions? Owners and shareholders? Managers and workers? The government? According to the MOU press release cited above, the South had sought exemption from taxes and fees to compensate for losses.
After the talks broke down, the MOU released a statement that expressed regret over the failure but little inclination to budge. Yonhap has reported that the MOU is going to put a final take-it-or-leave-it offer on the table, with “grave consqeuences”—presumably closure—if North Korea does not concede. Park currently is enjoying about a 70 percent approval rating, despite the roiling NIS scandal. The firms are no doubt watching what the North Koreans are doing closely and thinking hard about whether Kaesong is worth the risks. If I were negotiating for the North, I would think long and hard about this one; the Park administration does not seem in the mood to fold.
KCNA Coverage of the Breakdown: “North-South Working-level Talks End in Stalemate”
Kaesong, July 25 (KCNA) — The sixth round of the working-level talks between the authorities of the north and the south of Korea for the normalization of operation in the Kaesong Industrial Zone took place in the zone Thursday.
At the talks the north side mentioned the need to reduce some differences that still remain and reach at a full agreement as both sides approached much closer on many issues after exchanging draft agreements and sharing full discussions at the past five rounds of talks.
The north side proposed a realistic and reasonable draft revision of the agreement, fully reflecting the south side’s proposals including the issue of refraining from all acts of hindering the operation in the zone so that it may run on a normal basis unaffected by the situation under whatever circumstances, the issue of protecting safety of the personnel entering the zone and the properties invested by south Korean businessmen, the issue of settling communications, passage and customs clearance, the issue of ensuring world-level business activities and developing the zone into an economic zone with international competitive edge, reopening the north-south economic cooperation consultative office, the issue of forming and operating a joint committee, the issue of pushing forward in a simultaneous way the package progress of all the measures taken for the re-starting and normalization of operation in the zone. Both sides held discussions over these issues.
The north side made a suggestion of reflecting in the agreement the will to give assurances that the north and the south shall refrain from acts of hindering the normal operation of the zone in the meaning that both sides draw a lesson from the past incident and prevent its recurrence as there will be no end if the reason for the suspension of operation in the zone is to be probed and the responsibilities to be taken as for the issue of preventing recurrence and the north side has ample reasons to make claim to the south side as regards the issue.
As for the issue of the passage, communications and customs clearance, the north side suggested that the north and the south make joint efforts, discuss the issue of ensuring smooth communications through internet communication and mobile phones, streamlining the clearance procedures and cutting down the hours of customs clearance. It proposed referring the relevant military measures to the military authorities of both sides for the discussion and settlement of the issue at military working-level talks between the north and the south.
The north side also raised a reasonable way of reopening the already established north-south economic cooperation consultative office and providing an institutional mechanism as forming and running the joint committee and setting up necessary panel committees under it.
Taking into consideration the earnest requests of the south side’s businessmen to resume the zone so that they can reduce business damage as much as possible, the north side proposed making package promotion of all the measures for the re-operation and normalization of the zone. It suggested that heads of the delegations, persons directly responsible for the discussion, sign the agreement upon authorization.
But the south side came to the talks without any substantial preparations and only shunned the sincere efforts exerted by the north side for the successful talks. It consistently claimed that the north side is to blame for the suspension of the zone and made uncouth assertions that the north side should compensate for the damage.
The south side also asserted that this is its fixed stand and urged that unless the north side accepts it, there can never be the normalization of the zone.
The south side openly resorted to delaying tactics, taking an insincere approach to the talks even before 4 o’clock in the afternoon.
The north side made every possible effort to prevent the talks from not making any results but the south side persisted in its arrogant stand, pushing the talks to the point of stalemate.
The north side held a press conference on the spot right away and vehemently denounced the south side for torpedoing the talks.
The south side can never escape its responsibility for all the aftermaths to be entailed by its move of having pushed the talks to a deadlock. -0-