Kaesong to re-open, terms about as expected



According to a Ministry of Unification statement summarized by Yonhap, operations are set to resume next week at the Kaesong Industrial Complex after a five-month hiatus. As expected, North Korea made some relatively minor concessions on taxation issues.

According to Yonhap, “Under the deal, South Korean firms will be exempt from paying taxes for the rest of 2013 and the communist country agreed it will not ask for taxes that went unpaid in 2012 until the end of the year. Originally companies were due to pay taxes for last year in May.” The three month tax holiday is not much compensation for the abrupt five month closure of the complex, but as I have argued in previous posts, politics meant that the South Korean government would likely take a softer line than investors would in a less politicized environment.

The new agreement also contains a provision to improve communications by introducing radio-frequency identification devices (RFID). These will allow pre-approved South Koreans to come and go rather than having to cross the border at a scheduled time. However, the issues of allowing mobile phone use and internet access for South Korean investors was not resolved and remains under discussion. The ground rules for the planned Hwanggumpyong, and Wihwa Island zones allow Chinese businessmen to use their phones.

According to the MOU briefing, headway was made on the issue of the rights and safety of South Koreans at the industrial park, with the South Korean side demanding that notification be provided of anyone detained and that South Korean officials be present during questioning. There have been concerns on this score, and it goes without saying that the Mt. Kumgang tourism resort remains closed after North Korea refused to cooperate with South Korea in the investigation of a South Korean tourist killed by a North Korean guard.

The two sides agreed to hold an international investor relations session in October “to highlight the merits of the Kaesong complex to potential foreign companies.” The stated purpose is to promote KIC as a global manufacturing hub. The unstated goal is to make it harder for North Korea to interfere with the operation of the zone. It is hoped that the presence of human shields (i.e. third-country nationals) will raise the bar on North Korean brinkmanship.

Whether foreign companies will find KIC attractive is an open question. One of the striking findings emerging from the survey work that Steph Haggard and I did on South Korean firms operating there was just how important South Korean public policy support in the form of various indirect subsidies was in sustaining activity at KIC. Is the South Korean desire for human shields sufficiently strong to subsidize third-country investors as well?

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