Tussle at Kaesong



Trouble brewing for months at the Kaesong Industrial Complex has broken into the open against a backdrop of rising tensions associated with annual joint military drills conducted by the United States and South Korea.

In the aftermath of a unilateral five month closure of the KIC by North Korea last year, South Korea worked to strengthen institutional safeguards to secure the smooth running of the zone, while encouraging firms from third countries to locate there in the hope that obstructing the activity of non-South Korean firms would deter Pyongyang from interference with the zone’s operations. Indeed, the recently completed South Korea-China FTA contains provisions to grant 310 products produced in KIC reduced or tariff-free status in the Chinese market. Some previous FTA agreements, including those with India, ASEAN, Peru, and Colombia also extended preferential treatment to a limited number of products produced at KIC. Thus far, with the exception of a single German sales office, third country investment has not been forthcoming.

But while North Korea has not since physically interfered with the operation of the zone, it has undertaken unilateral measures that have the potential effect of expropriating the foreign investors economically.

In September, the North reportedly informed Seoul of its intention to unilaterally re-write the KIC rules to permit the North Korean authorities to demand reparations, seize properties, and even detain South Korean businessmen in the event that South Korean firms decide to shutter operations there. Then on 6 December, North Korea announced that it was unilaterally raising the KIC minimum wage above the agreed upon 5 percent cap as well as rewriting rules on overtime and dismissal.

Such moves amount to economic expropriation by reducing the value of sunk investments made under a different set of terms. Last week Seoul rejected the move and called for consultations through the established channels. South Korean businessmen filed a formal protest through the established mechanism as well. The key point is that for whatever reason, more than a decade since its opening, North Korea is still unwilling to permit the zone to operate under an agreed upon set of rules and procedures without interference but instead engages in brinkmanship tactics that run counter to a rational long-run goal of regularizing and depoliticizing commerce. Whether after the military drills the tensions will subside, or if these latest moves are a harbinger of more to come remains to be seen.  Stay tuned.

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