North-South Trade Update 2: May 24th Measures Fallout

Back in mid-September, Yonhap reported on a little-remarked insurance program that speaks volumes about the risky nature of North-South trade. Although easily understood in political economy terms, the program suggests how hard it is to put North-South relations on a commercial footing given the political stakes—and risks--involved.

In the wake of the sinking of the Cheonan, the LMB government announced a wide-ranging set of sanctions against the North that came to be known as the “May 24^th (2010) measures.” The measures blocked aid, trade and investment with the North and even prohibited contact with North Koreans outside of Kaesong. In an infamous case, the MOU fined a South Korean organization devoted to the plight of the comfort women 500,000 won for releasing a joint statement with a North Korean counterpart organization without seeking the government’s approval.

A spate of bad news has accumulated from South Korean business organizations on the fate of small investment and trading operations in the North that were located outside of Kaesong. Under intense political pressure, the South Korean government agreed to what amounts to an insurance scheme to pay cash to local firms financially distressed by the May 24^th measures. The program is not hugely generous; on the other hand, this could be just the first installment.

Based on the press release by MOU, 7.5 billion won (US$6.7 million) has been allocated, which will be doled out until the end of this year. The cash will come out of the Inter-Korean Cooperation Fund (IKCF, with the Korea Ex-Im Bank as the agent), the government’s main funding source for North-South projects; the upside of the May 24^th measures is that IKCF has little else to do. As of the end of September, about 1.3 billion won (US$1.2 million) has been paid to 83 companies with that amount set to go up as the program continues through the end of the year. Additionally, MOU has offered a total of 56.9 billion won in loan assistance to 221 firms (these were also provided through IKCF) since May 24, 2010.

The government has claimed that the May 24^th measures impose $300 million of costs on North Korea. Critics of the May 24^th measures—like Hankyoreh—make the standard (and irrelevant) argument that the sanctions hurt South Korean companies more than the North.

These insurance programs underscore the dilemmas of engagement with a country like North Korea. On the one hand, there is a sound logic in allowing—and even encouraging—private trade and investment with the aim of influencing North Korean behavior. In surveys we have done of Chinese and South Korean firms doing business in the North, we find that while most investment is dominated by state-owned counterparties, at least some of the pure traders have found private or private-like customers and suppliers. However, if the government does seek to encourage such investment and trade, it runs the risk of being blamed when things go wrong. It also ties its own hands with respect to sanctions; the leverage that engagement purports to yield ends up working in reverse.

Our favored solution is that which appears to be the current policy of Beiing: invest and trade at your own risk so that the North Koreans can learn to calculate the costs of bad behavior.

Following are some details on the program, the “Emergency operational cost support for inter-Korean trade and economic cooperation firms (남북교역·경협기업 긴급운영경비): Guidelines,” taken from the Korea Eximbank website, English translation by Jaesung Ryu.

1.    Target [firms]

• [Inter-Korean] trading firms that have trade of more than US$10,000 between June 2009 and May 2010. Such trade includes pure trade (general or processing on commission trade) and not exit or entry of materials related to Kaesong Industrial Complex, Mt. Kumgang tourist complex, inland investments, humanitarian assistance, and social and cultural cooperation projects.
• Firms that have been engaged in inland investment activities that are registered as an inter-Korean economic cooperation project with proof of project records (exit or entry of materials, cash investment, transportation records) between June 2008 – May 2010.
• Firms and their affiliates (subcontractors) authorized under inter-Korean economic cooperation project related to Mt. Kumgang tour

2.    Exclusions

• Firms in Kaesong Industrial Complex (firms that are simultaneously engaged in investment or trade activities in North Korea outside Kaesong with necessary records are included)
• Public (government) organizations designated under article 4 of the Management of Public Organizations Law [Note: these are mostly SOEs or similar entities that the government effectively controls either through financial support which amounts to more than 50% of revenue or in which it holds more than 30% of its shares.]
• Firms closed prior to May 24, 2010 (Firms related to Mt. Kumgang tour project are included).
• Firms that are continuing their inland investment projects after May 24, 2010.
• Firms with less than US$10,000 of trade between June 2009 and May 2010.
• Firms that have violated laws related to inter-Korean exchange and trade (including the representative individual).

3.   Total Size [of support]

7.5 billion won (US$ 6.7 million)

4. Method of Support

Free-of-charge assistance [Note: ie., a direct subsidy or transfer]

5.  Support amount by firm type and record

• Fixed amount payment by trade record or investment size per firm type
• Trading Firms
  • Trade equal or more than US$ 1 million: 15 million won (~ US$ 13,000)
  • Trade equal or more than US$ 10,000 but less than US$ 1 million: 10 million won (~US$ 9,000)
• Firms with inland investment or related to Mt. Kumgang tour
  • Investment equal or more than US$ 3 million: 20 million won (~US 18,000)
  • Investment equal or more than US$ 1 million but less than US$ 3 million: 15 million won (~US$ 13,000)
  • Investment equal or more than US$ 10,000b tu less than US$ 1 million: 10 million won (~US$ 9,000)
  • Investment less than US$ 10,000: 5 million won (~US$ 4,500)

*Investment size only includes inland and Mt. Kumgang tour related investment and exclude investments in Kaesong industrial comple

6.       Conditions

• If the same firm has been engaged in both trade and investment activities, payment is offered only once based on the larger amount of either activity.
• Firms that are currently in arrears for their IKCF loans will have to settle the due amount first in order to receive assistance [NOTE: this detail underscores that some firms had received preferential credit to invest and/or trade in the first place

7.  Application Period

September 19, 2012 – December 18, 2012 (3 months)

8.  Application Process

• Notification of trade records and investment size (MOU à Korea Eximbank)
• Consultation (Support process, application form, etc)
• Application (a. Application form b. Business license copy c. Other documents)
• Payment (paid to submitted bank accounts within 1 month, after review)

[Information not translated includes additional logistical requirements and contact info for the Korean Eximbank desk]