Ever since the United States detonated a nuclear weapon over Japan at the end of World War II, nations have felt the need to pursue a nuclear weapons program. They have sought nuclear weapons as the ultimate means of deterrent, as a means to gain leverage over their adversaries, and as a form of international prestige. In the case of South Korea, the success of North Korea’s recent nuclear test and the heightened rhetoric for war coming out of Pyongyang has caused some leaders in Seoul to rethink the necessity of maintaining their own nuclear arsenal as a means of deterrence. However, this path, while potentially appealing, comes with significant political and economic costs that would ultimately make pursing an independent nuclear deterrent a mistake.

Why South Koreans Might Think They Need Nuclear Weapons

As the Cold War was dawning, the Soviet Union felt it needed nuclear weapons to maintain parity with the United States. France, which remained outside NATO’s military command for 43 years and has always sought the ability to project military power independent of the United States, followed the Soviet Union and the United Kingdom’s acquisition of nuclear weapons to bolster its own military might. Even South Korea previously sought nuclear weapons after the United States withdraw from Vietnam. The lure of nuclear weapons is so strong that Saddam Hussein allowed other countries to think he might have them as a means of deterrent.

Since South Korea gave up its own ambitions to acquire nuclear weapons in the 1970s, it has relied on the protection of the United States nuclear umbrella. However, with North Korea’s successful missile and nuclear tests, withdrawal from the Korean War armistice, and increasingly hostile rhetoric, some in South Korea have begun discussing the option of Seoul gaining its own nuclear deterrent or seeking the return of U.S. tactical nuclear weapons to the peninsula as the New York Times recently reported.

Under the United States’ nuclear umbrella, South Korea depends on the extended deterrence of the United States’ nuclear weapons to preclude either a nuclear attack or a large scale conventional attack. The principal of extended deterrence works as long as both potential adversary and the country under protection believe that the U.S. promise of nuclear retaliation is credible. The other challenge is that, while extended deterrence has worked to deter major attacks on U.S. allies, it has not proven successful in preventing the small scale attacks North Korea has engaged in with the sinking of the Cheonan and the shelling of Yeonpyeong-do.

However, it is not just North Korea’s actions that have prompted discussions of changes in South Korea’s nuclear posture. According to polling by the Asan Institute for Policy Studies, South Koreans have begun to lose faith in the credibility of the nuclear umbrella. In 2012, only 48 percent of South Koreans thought the United States would respond with nuclear forces if South Korea suffered a North Korean nuclear attack. That is a 7 point decline from the previous year. At the same time, public support for the development of South Korea’s own nuclear weapons program has grown from 56 percent in 2010 to 66 percent shortly after North Korea’s third nuclear test.

The Potential Costs of Going Nuclear

While a good deal of attention has been paid to the potential impact of the reintroduction of U.S. nuclear weapons to the Korean peninsula or the development of South Korea’s own nuclear weapons on Seoul’s own deterrent posture, relatively little attention has been paid to the potential political and economic costs South Korea might face if it choose to develop its own nuclear weapons.

South Korea developing its own nuclear deterrent would in many ways be unprecedented. No state with a Mutual Defense Treaty with the United States has acquired a nuclear weapon since the advent of the Nuclear Non-Proliferation Treaty (NPT). Additionally, other than North Korea, all of the states that have developed nuclear weapons since the NPT have done so while outside of the NPT. North Korea tested its first nuclear after it’s withdraw from the treaty.

Additionally, Seoul would be in violation of its NPT responsibilities, and if it withdrew from the treaty, join North Korea as the only countries to withdraw from the NPT. It would likely find itself unable to draw upon the Nuclear Suppliers Group, which provides much of the fuel needed to power nuclear plants.

It would also find itself in violation of its civilian nuclear agreement with the United States, which inhibits its ability to use nuclear plants with any U.S. content for weapons development, and see the current talks to extend the agreement grind to a halt.

South Korea’s Domestic Nuclear Program

The development of a nuclear deterrent would likely end South Korea’s goals of becoming a nuclear exporter. It could also potentially impact South Korea’s own domestic nuclear program. South Korea has a robust domestic nuclear program which meets 13 percent of its domestic energy needs and a desire to become a player in the international market for nuclear power exports.

In 2009, South Korea won a $40 billion contract to manage and construct four nuclear power plants in the United Arab Emirates. This was seen as a first step in South Korea’s efforts to become a significant player in the nuclear export industry and potentially build 80 plants worldwide by 2030. That contract would likely be at risk as well as South Korea’s own long term fuel supply.

Economic Sanctions

In recent years, both North Korea and Iran have seen economic and financial sanctions placed on their economies as they either pursued or were suspected of pursing nuclear weapons. South Korea would also likely face either bilateral or multilateral economic sanctions.

India and Pakistan faced sanctions for their pursuit of nuclear weapons. While UN sanctions only called on countries not to supply technology, equipment, or material that could benefit their programs, both faced additional U.S. sanctions which prohibited military assistance and support for loans in financial institutions.

Because of the unique nature in which South Korea would develop nuclear weapons, it is hard to truly know what the consequences might be. However, on a minimal level history would suggest that Seoul would find itself facing economic sanctions and limits on its own nuclear program unless it pursued nuclear weapons in the face of eminent war. Perhaps South Korea, due to its international reputation and sympathy for the challenges it faces from North Korea could minimize these costs, but there are no assurances that it would not face the same type of sanctions that Iran and North Korea face today.

While North Korea clearly presents unique challenges to South Korea, there is no reason to believe that the U.S. nuclear umbrella is unreliable. At the same time, the costs of pursing a nuclear weapons program in the absence of a clear failure of deterrence means that while there will likely continue to be robust debate about the option of developing nuclear weapons as long as North Korea continues its provocations, it is not an option which South Korea is likely to seriously pursue.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are his own.

Photo from U.S. Pacific Fleet’s photostream on flickr Creative Commons.

As the United States and South Korea begin celebrations of 60 years of the U.S.-Korea alliance, President Park Geun-hye arrives in Washington, DC for her first summit meeting with President Barack Obama at a time of heightened tensions on the Korean peninsula. In recent months, North Korea has dominated the news, and U.S.-Korea relations, as it has conducted a third nuclear test, withdrawn from the Korean War armistice, effectively shut down the Kaesong Industrial Complex, and increased its rhetoric to new levels.  While addressing the challenges of North Korea will be central to the discussions between Park and Obama, it is not the only issues for the two leaders to discuss.

With relations between the United States and South Korea are at an all-time high, Park and Obama will discuss ways to continue the close cooperation the United States and South Korea have enjoyed in recent years. In the run up to this week’s meetings, both sides addressed one of the major issues confronting U.S.-Korea relations by agreeing to extend the two sides’ civilian nuclear cooperation agreement for two years. With the Park government and the second Obama administration only slowly coming into shape, buying time to further discuss issues such as South Korea’s request to reprocess spent nuclear fuel represents a prudent first step.

On the economic front, both sides will have plenty to discuss. With the KORUS FTA in place, both countries will continue to discuss ways to ensure that the agreement is fully utilized by both sides. To this end, Park is arriving in Washington with the largest business delegation of any prior Korean president to continue expanding U.S.-Korea economic cooperation. At the same time, Park will likely raise Korean concerns over the KORUS FTA’s dispute settlement mechanism and continue to press for Korea to receive an increase in professional visa’s to help spur additional economic cooperation.  While the United States will seek South Korea’s participation in the growing Trans-Pacific Partnership free trade talks.

Also on the agenda will be the future role of the alliance. In 2009, the United States and South Korea released a Joint Vision statement outlining areas of regional and global cooperation. With the new administration in Seoul, discussions will center on how to further strengthen cooperation and the Park administration’s proposal of a Seoul Process to build trust and cooperation in Northeast Asia.

However, North Korea will present the most immediate challenge. Recent weeks have seen both the United States and South Korea transition from a period of deterring North Korea’s provocations to opening the door for further engagement with Pyongyang. Discussions will likely center on South Korea’s proposals for engaging North Korea in a trust building process and how best the United States can support South Korea’s leading role in engaging Pyongyang.

While summit meetings are often action forcing events, the first meeting is often more about developing a strong working relationship and setting a course for the years ahead. As Obama and Park hold their first formal meeting, they will look to build upon the strong working relationship that has existed between the United States and Korea in recent years and chart a course for the years ahead.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute of America.

Photos from Cheong Wa Dae and White House.

Dr. Sunny Lee’s recent PacNet article captured the dynamics between South Korea, China, and the United States as they try to develop better overall relations while simultaneously dealing with a provocative North Korea. A fascinating part of the article touched upon South Korea wanting to “‘work on’ China so that China leans toward South Korea and eventually supports Seoul-led unification.” In addition, writings by Chinese scholars and online commentary are creating a perception that China may be shifting its policy on North Korea and potentially being open to more conversations on unification. Yet there are reasons these talks on unification have not developed previously, such as China’s own vision for unification, historical and territorial concerns, and closer ties between the U.S. and South Korea compared to China-ROK ties. South Korean desires for better relations with China are understandable and important. However, South Korean leaders should use caution when discussing unification with China as the perceived opportunities could actually be detrimental to the South Korean-led process of unification.

Dr. Lee cited the Financial Times op-ed by Deng Yuwen of China’s Central Party School as an example of China’s shifting policy on North Korea and that South Korea may be able to convince China to let South Korea lead. Setting aside the question of whether China’s policy toward North Korea is shifting, evolving, readjusting, or staying the same, the more interesting aspect of the piece was the second to last paragraph on unification. Deng suggests China should abandon North Korea in order to “take the initiative” on unification, which would “undermine the strategic alliance between Washington, Tokyo and Seoul; ease the geopolitical pressure on China from northeast Asia; and be helpful to the resolution of the Taiwan question.” None of those appear to be in the main interests of South Korea. Even though his reasons for ditching North Korea might resonate with Seoul and Washington, if Mr. Deng’s argument wins out, South Korean officials will have a lot of work to do on Chinese leaders to convince them to let South Korea handle everything.

China’s views and interests regarding stability on the Korean peninsula in the case of a collapse of North Korea should be considered as well. As these precarious periods with North Korea have illustrated, the Chinese leadership has a different definition and comfort level for stability on the peninsula. If collapse is imminent, there is a possibility that the Chinese government would work to prop up the North Korean leadership in order to avoid the negative consequences stemming from instability on its doorstep. As painful as the reunification process may be, a more painful sight might be unification being so close only to be taken away at the last minute by China’s support for North Korea.

In addition to differing views on unification and stability, contentious views over historical territory could prevent an understanding between China and South Korea on the unification process. The Koguryo issue, where Chinese and Korean historians and leaders dispute the historical territory of the Koguryo kingdom and the Chinese empire, has been a vexing complication in South Korea-China relations. Koreans fear China using historical claims that its former people controlled areas that are now part of North Korea to allow the Chinese military to move in if there was trouble in North Korea or just for political purposes during unification talks. In contrast, Chinese leaders and scholars are worried Korea will claim parts of China after unification as part of a greater Korea because parts of the former Koguryo kingdom are now part of modern China.

In Scott Snyder’s book China’s Rise and the Two Koreas: Politics, Economics, Security, he states that “…the Koguryo dispute takes on a greater significance and drastically limits options for compromise on either side.” Mr. Snyder also emphasizes that many South Korean leaders and citizens view China’s handling of the Koguryo issue as a litmus test for China’s overall intentions in Northeast Asia. Putting it all together, if the Koguryo issue leaves China and South Korea little room to compromise, South Korea will have to work very hard to convince China that the compromise is actually to let South Korea manage the unification process.

Moreover, former U.S. Senator Richard Lugar thought this historical issue and its impact on China’s views toward unification was so important, before he left office, he pushed the U.S. Senate Foreign Relations Committee Minority Staff to write a report for the committee in order to explain the complexities and concerns over China’s views on unification of the Korean peninsula. Thus, while China and Korea may have been able to keep the issue quiet recently, when unification is close, this territorial issue will likely be prominent again.

In his PacNet article, Dr. Lee suggests that South Korea’s efforts with China are actually also geared toward getting the U.S. to “accommodate Seoul’s long-running complaints” in the U.S.-ROK relationship. While there may be some difficult issues between the U.S. and South Korea, it would appear that on big issues like unification, the two countries are on the same page or at least very close. The main evidence for this is the Joint Vision Statement that came out on June 16, 2009 during President Lee Myung-bak’s visit to the United States. The statement acknowledges the desire by the United States and South Korea to work together “to build a better future for all people on the Korean Peninsula, establishing a durable peace on the Peninsula and leading to peaceful reunification on the principles of free democracy and a market economy.” Moreover, during her time as U.S. Ambassador to South Korea, Kathleen Stephens emphasized the Joint Statement at a Korea Institute for National Unification event featuring the U.S., Japanese, and Russian ambassadors and noted that “nothing has disturbed me more over the years than at times having it suggested to me by Korean friends or others that somehow the United States thinks the division of the Korean peninsula is right or even serves U.S. interests. Nothing could be further from the truth.” China’s Ambassador to South Korea was invited but did not attend the event. It might be easier for South Korean-led unification to happen with a free democracy and a market economy as seen in the U.S. and Korea versus the soft totalitarianism and mixed economy in China.

In addition to the Joint Vision Statement, David Straub from Stanford University stated that “the United States is more than willing to let South Korea take the lead on North Korea — as long as it is comfortable with the general direction.” In many ways unification policy is an extension of North Korea policy. Therefore, if the U.S. is comfortable with South Korea taking the lead on North Korea policy, then if South Korea’s plan for unification is with the framework expressed in the Joint Vision Statement, the U.S. should be comfortable with South Korea leading the unification process as well.

Almost everything involving unification is complicated. But a perceived shift in China’s North Korea policy doesn’t automatically mean it will shift its unification policy to be like South Korea’s. As Deng Yuwen’s article suggests, China might ditch North Korea in order for the Chinese government to take the lead in facilitating unification. South Korea should be careful in thinking that it can easily woo China into accepting South Korean-led unification and remember that it has a committed ally in the United States already capable of supporting South Korea’s desired process.

Nicholas Hamisevicz is the Director of Research and Academic Affairs for the Korea Economic Institute of America. The views expressed here are his own.

Photo from Christian Senger’s photostream on flickr Creative Commons.

With the passing of Kim Jong-il in December of 2011, the United States and South Korea entered into a new period of uncertainty with North Korea. Shortly after Kim Jong-un assumed power, questions were raised regarding the extent of his hold on the regime in Pyongyang and what his rise to power would mean for the future of North Korea. The events of recent months have only added to the level of uncertainty surrounding the regime in Pyongyang. While the rhetoric and provocations have begun to subside, the most recent crisis has seen a shift in the use and intensity of bellicose rhetoric by the regime in Pyongyang.

North Korea has a history of engaging in threats to extract concessions from the United States and South Korea. During his time in power, Kim Jong-il mastered the art of escalating a crisis for effect, only to dial the tensions back down when the time was right to achieve his ends. Over the years, the United States and South Korea grew familiar with his patterns of behavior, much as with Kim Il-sung before him. With Kim Jong-un that same level of familiarity has yet to develop.

While the events of recent months contain elements of North Korea’s prior provocations, there has been a higher degree of specificity in the threats, an increase in the rhetorical intensity, and a longer duration than during previous crises. North Korea has also shown an increasing ability to follow through on its threats. Though North Korea does not yet possess the technical capability to hit targets in the mainland of the United States, it has demonstrated a growing sophistication in its nuclear and missile programs. The wreckage from the December satellite launch has lead some in the intelligence community to believe that North Korea is closer to miniaturizing a nuclear warhead than was previously believed.

If North Korea’s weapons programs are growing more sophisticated, the recent crisis has also seen a shift in Pyongyang’s rhetoric. Since Kim Jong-un took power the hostility of North Korean rhetoric has increased markedly, even during times of perceived calm. An analysis of the current and previous crises with North Korea shows the use of terms such as “war,” “satellite,” and “nuclear” growing markedly more prevalent in North Korean rhetoric in KCNA than terms such as “peace,” “reconciliation,” and “dialogue” (see foot note for details)[1].

During the recent crisis that began in December, many analysts have noted the increasing volume of provocative rhetoric coming out of North Korea. However, analysis shows that the increase in rhetoric under Kim Jong-un predates the current crisis. In 2012, references to “war” in KCNA were up 190 percent from 1998, when North Korea was sanctioned for a missile test, and 107 percent from North Korea’s second nuclear test in 2009. In 2012, references to war never fell below 217 in a month and were over 300 in all months but January and November. In 1998, they never exceeded 166 mentions in a single month, while in 2009 they only exceeded 200 when North Korea evicted IAEA inspectors in March and when it was sanctioned by the UN in June. In the case of 2009, mentions of war decreased by 50 percent in April and 28 percent in July after spikes in the prior months (Chart 1).

Chart 1: Use of terms “War” and “Peace” in 1998, 2009 and 2012

While North Korea’s use of “peace” in its rhetoric is also increasing, it is growing at a slower rate than “war.” The use of peace in KCNA rose by 129 percent from 1998 to 2012 and 77 percent from 2009 to 2012 (Graph 1).

Graph 1: Ratio change and usage change of terms of “War” and “Peace” between 1998 and 2012

Interestingly, there seems to be a pattern in North Korea’s usage of the terms “war” and “peace,” which are used in tandem at a roughly 2-to-1 ratio. In 1998, war was used on average 1.98 times for every usage of peace. In 2009, the year of North Korea’s second nuclear test, the ratio rose slightly to 2.11. However, in 2012 the ratio rose to 2.38 percent, a 20 percent increase from 1998, despite relative calm for most of the year.

At the peak of the crisis over the December 2012 satellite launch, references to “satellite” grew nearly 170 percent compared to a similar period after the August 1998 launch (Chart 2).  References to “nuclear,” however, during the peak points of the 2009 UN sanctions and the most recent UN sanctions in response to North Korea’s third nuclear test are virtually identical (Chart 2). This difference most likely stems from the dispute between North Korea and the United States over the nature of its satellite program.

Chart 2: Use of terms “Satellite” and “Nuclear” in 1998, 2009 and 2012

However, looking beyond the peaks there is a notable increase in North Korea’s use of “nuclear” in its rhetoric under Kim Jong-un. References to nuclear in KCNA grew 164 percent from 1998 to 2009, and another 70 percent from 2009 to 2012. Overall, references to nuclear have grown 350 percent from 1998 to 2012 and were up another 139 percent over the first three months of 2013 compared to the same period in 2012 (Graph 2).

Graph 2: Usage change of terms “Satellite” and “Nuclear” between 1998 and 2012

North Korea’s use of more positive terms such as “reconciliation” and “dialogue” has been inconsistent (Chart 3). Mentions of reconciliation have actually fallen since 1998 by 32 percent between 1998 and 2009, though they rose by 27 percent between 2009 and 2012. This is somewhat interesting given the harsh rhetoric Pyongyang directed towards Lee Myung-bak during the period. However, overall mentions of reconciliation are down 14 percent from 1998 to 2012 and are down another 17 percent over the first three months of 2013 compared to the same period in 2012.

The use of “dialogue” has risen 56 percent between 2009 and 2012 and 41 percent overall between 1998 and 2012. However, over the first three months of 2013, much like North Korea’s use of reconciliation, usage of dialogue is down 41 percent over same period in 2012.

Chart 3: Use of terms “Reconciliation” and “Dialogue” in 1998, 2009 and 2012

Despite the use of “dialogue” being down over the first three months in 2013, there may be indications in the shift of the crisis in April. Data for this study was only available through the first half of April, but in that time use of dialogue in KCNA was up 29 percent from March and at a higher level than at any point during 2012.

Despite the potential positive sign in North Korea’s usage of “dialogue” over the first half of April the overall rate of usage of terms such as “war” and “nuclear” are growing at a faster rate than “reconciliation” and “dialogue.”

Beyond the increasing usage of rhetoric by the regime in North Korea, there have also been changes in the tone of the rhetoric. Under Kim Jong-il, North Korean rhetoric while certainly bellicose was calculated, predictable, measured, and occasionally even conciliatory. In earlier periods of the North Korean nuclear crisis, efforts to allow inspectors from the IAEA were rhetorically deemed almost diplomatically as “unreasonable” and Kim Kye Gwan argued that dismantling North Korea’s nuclear weapons without a peace treaty would be “unreasonable” as well. As recently as 2005, Kim Jong-il’s government stated a potential for “friendship” between the United States and North Korea, and Kim Jong-il admitted that he thought “favorably” of the United States.

The rhetoric under Kim Jong-un has not been so friendly.

In place of intermittent conciliatory language, the regime under Kim Jong-Un has opted for escalation. Kim Jong-il’s threats were largely innocuous, typically referring to “effective countermeasures” in a defensive response to an American attack. Media threats under Kim Jong-un, however, designate specific targets and even threaten pre-emptive war. Whether these too are innocuous remains to be seen.

Less clear is the intent of the rhetoric. Under Kim Jong-il, North Korea used provocations and hostile rhetoric to extract political and material concessions from the West, such as light water reactors and bilateral talks with the United States. With Kim Jong-un the motives are more opaque.

Many analysts have suggested that, along with the need to consolidate power domestically, the regime is setting the stage for future negotiations. However, Pyongyang has made clear that its nuclear weapons are not up for negotiation, calling them “the nation’s life” and, in contrast to the past, has made virtually no demands of the West other than halfhearted appeals for a peace treaty.

Prior to the United States and South Korea offering talks, media references to bilateral discussions with the United States were nonexistent; in many respects leaving the impression that North Korea was disinterested in talks at all. In fact, the only mention of talks is from anonymous sources in China, which may not be accurate as the Economist has reported that no high level meetings have taken place between China and North Korea in months. At the same time, Pyongyang’s response to the offer of talks has been to set its own preconditions, demanding the end of sanctions and U.S.-South Korea military drills.

What has become clear in the early stage of his rule is that Kim Jong-un will be different and more willing to engage in provocations than his father. With the growth in rhetoric predating the successful satellite launch and third nuclear test, it seems likely that the shift in leadership style we are witnessing is driven more by the new leadership than North Korea’s recent successful weapons tests. However, those same weapons tests could make the regime more dangerous in the future. With the successful tests behind it, the regime could feel emboldened in the measures it could take, making future crises potentially less stable if Pyongyang continues to escalate the level of rhetoric.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute of America. Andrew Kwon is a recent Masters of International Security Graduate from the University of Sydney. Peter Taves is currently undertaking a Masters of International Economic Relations at American University. The views expressed here are the authors alone.

Photo from theADDproject.com’s photostream on flickr Creative Commons.

The fear that North Korea’s suspension of activities at the Kaesong Industrial Complex would have broader implications began to materialize last week when Daewha Fuel Pump Industrial Ltd. announced it failed to deliver parts in time to its Indian customer. Other companies are beginning to publicize their setbacks as well. The economic challenges for businesses like Daewha from the suspension of operations at Kaesong could have spillover effects for future investments in Kaesong and South Korea’s trade negotiation strategy. Moreover, the announcement from Daewha puts another South Korea – India economic connection into the spotlight. President Park Geun-hye and the businesses involved in Kaesong need to have patience, luck, and some business acumen in order to regain confidence from investors, economic benefits for customers, and opportunities for expansion when Kaesong is reopened.

The announcement from Daewha about its inability to maintain a steady supply to a customer was the fear of many supporters of the Kaesong operation. Without the ability to constantly supply customers, the strategic and economic advantages for Kaesong begin to dwindle for many Korean companies.

As one of the last remaining inter-Korean connections, Kaesong also helped provide an avenue for South Korea to communicate with North Korea as well as try to lay the groundwork for peaceful unification. However, with Daewha’s loss and troubles beginning to emerge with other companies, the opportunities available in Kaesong have again been questioned.

A part of those strategic and economic advantages were the potential future opportunities. Because of Kaesong’s previous success, some experts recommended that South Korea build more complexes like Kaesong. The Park Geun-hye administration also had plans to try to internationalize Kaesong and attract firms from other countries to set up in the industrial zone. Recent events will be an impediment for that goal. To revive the potential for expansion at the complex the Park administration will need a combination of good public relations (PR) and economic successes to ease the concerns of investors once Kaesong is up and running again.

Further potentially complicated by the work stoppage and the Daewha news is South Korea’s trade negotiation strategy to include language allowing for goods from Kaesong to be part of their trade deals. Future partners are now likely more aware of the political risks of increasing access to goods from Kaesong. One potential outcome from could be countries asking for language similar to the KORUS FTA that points to the development of specific conditions on the Korean peninsula before access for goods from Kaesong would be granted [Annex 22B]. This may require South Korean negotiators to repackage how they convince their counterparts to allow clauses potentially permitting goods produced in Kaesong to be included in their bilateral trade deals.

The news from Daewha was also tough PR for South Korea-India relations. Economics has been a major avenue for the two countries to work together. However, the cancellation of the partnership provides another example of an economic opportunity being damaged by political difficulties. While the Daewha example is on a much smaller economic scale than POSCO’s investment in Odisha, India, both illustrate politics affecting economic interaction between South Korea and India.

Moreover, India and South Korea are trying to reach their stated goal of $40 billion in total trade by 2015. Yet two way trade was still just below $19 billion in 2012. Even though Daewha claimed the deal was less than one percent of its sales last year, misfortunes of this nature also hold back the expanding economic relationship.

North Korea’s threats and initial suspension of the Kaesong Industrial Complex raised questions about the ability of companies to complete their orders and the future of investment opportunities in Kaesong. Unfortunately, a couple of weeks into the suspension, the impact is becoming real and damaging economic interactions beyond South Korea. These setbacks have only heighted the scrutiny of the consequences of operating in Kaesong, making it more difficult for the Park Geun-hye administration to attract investors to the complex, support the businesses there, and create opportunities for expanding the strategic and economic possibilities of Kaesong.

Nicholas Hamisevicz is the Director of Research and Academic Affairs for the Korea Economic Institute. The views represented here are his own.

Photo from Korea Economic Institute of America.

During the past several weeks, international viewers were treated to a series of broadcasts from major news outlets trumpeting every bellicose statement and video from Democratic People’s Republic of Korea (DPRK).  This culminated two weeks ago, in the run-up to two North Korean anniversaries where “something” was expected to happen, with one hour specials on possible war scenarios and sensationalizing the military threat, including an analysis by a retired U.S. Army general about the possibility of North Korea seizing Pyeongchang, the site of the 2018 Winter Olympic Games.  As a result of these and other reports, some foreign investors in South Korea were considering contingency plans for production and workers.  Other firms were rethinking plans to invest in South Korea.  Yet, if you walked the streets of any city in South Korea, you would find that business was going on as normal and most people brushed off the shrill rhetoric from North Korea as a part of a regular occurrence that happens every spring when the United States and the Republic of Korea (ROK) embark on their annual military training exercises.  Nevertheless, there was a huge gap between international media coverage of North Korea in early April (be worried! prepare! be ready to go to underground shelters! imminent missile launch!) and the view from the streets of South Korea (shrug).  Now that North Korean invectives have diminished in recent days, media attention has gravitated to the next story.

However, while North Korea would be overwhelmingly and quickly defeated in any military action against South Korea, what was behind North Korea’s heightened rhetoric and actions?  We know that because regime survival is North Korea’s primary objective, their leaders are not suicidal.  Why then does North Korea make these bizarre provocations?  Many have pointed to the need for the relatively new and young North Korean leader Kim Jong Un to assert his leadership credentials and toughness, particularly by continuing with the North’s military-first policy.  Perhaps the North Korean leadership believes that China will never substantively crack down on them.  Even so, some have raised questions about North Korea suspending work at the joint ROK/DPRK Kaesong complex, which employed 53,000 North Koreans, representing 1 out of 5 people living in Kaesong, and brought in an estimated $80 million of desperately needed hard currency in 2012 for the DPRK regime.  To these observers, suspending work Kaesong didn’t make any sense and was not in North Korea’s economic interest.  In fact, they believe it hurts the North by denying work opportunities for its citizens and eliminating a valuable source of hard currency.

However, North Korea’s recent actions, including the suspension of work at Kaesong, are form of psychological and economic warfare against South Korea in response to heightened international sanctions against North Korea.  While South Korean citizens have become used to the threat from North Korea over the past 60 years and go about their daily lives, those who live outside of Northeast Asia were taken-aback by this augmented bellicose talk and action from the North.  This work-suspension order by the DPRK affects more than just the relatively small economic benefit of Kaesong.  Anything that North Korea can do to shake the confidence of foreign investors in South Korea is a political win for North Korea.  If North Korean words and actions cause any foreign investor to withdraw from South Korea for political risk concerns, that would be an immense victory for the North.  That’s why foreign investors should not be spooked by the shrill North Korean rhetoric because that only plays into the hands of the North Korean leadership.  These tactics are a non-kinetic way for North Korea to inflict damage on South Korea.  The North knows they cannot defeat South Korea militarily so the DPRK resorts to these unconventional and potentially untraceable methods.

On April 11, 2013, South Korean President Park Geun-hye met with representatives of foreign investors to reassure them that South Korea is a safe place to invest.  President Park told the participants that “a stable environment will continue to be made in which you can feel secure and make investment and conduct business.”

Whenever North Korea has embarked on their reckless course of action in the past, the South Korean economy has remained strong (see chart).  Sometimes, there was a temporary drop in the measurements of the strength of the Korean economy, but in every instance, the markets recovered and grew even stronger.  At no time did the international bond ratings of South Korea  drop as a result of North Korean threats.  The same occurred during this latest round of provocations from North Korea – in fact, the Korean Composite Stock index grew during the week of the highest tensions, and foreign direct investment reached $3.39 billion in the first quarter of this year, representing a 45 percent increase from a year ago.  Fortunately, the company representatives present at the April 11^th meeting recognized these facts and reaffirmed confidence in the business environment in South Korea.  Some companies even outlined plans for expansion and growth.  But not every foreign company with a presence or plan to operate in South Korea was present at this meeting.  These firms need to look behind the saber-rattling special reports of cable news networks on North Korea and look at the big picture – while South Korea is sufficiently prepared to deter any DPRK provocation, it is also open for business and is still an attractive place for foreign investment. Now that belligerent North Korean rhetoric has dampened somewhat, it is important for foreign investors in Korea to remember this lesson for next time, particularly as another North Korean anniversary looms on the horizon with potentially more provocative behavior by the DPRK.

Phil Eskeland is the Executive Director of Operations and Policy for the Korea Economic Institute of America. The views expressed here are his own.

Photo from Luther Bailey’s photostream on flickr Creative Commons.

While North Korea ratchets up the tension in Northeast Asia, Kim Jong-un made the bold—though not surprising—decision of withdrawing all North Korean workers from the Kaesong Industrial Complex. Recently, South Korea and the United States together have called for a dialogue with North Korea. North Korea has dismissed the offer by denouncing it as a “crafty trick.” To some extent, offering a dialogue manages North Korea’s provocations. So, is it a signal of moving into a new game on the Korean Peninsula? For South Korea it is now crucial to plan what to do next while preparing for a new game with Kim Jong-un.

First, South Korea’s call for a dialogue is not an “out of the box” response to North Korean decision-makers. So, it is unlikely that this offer changes the atmosphere surrounding North Korea’s decision-making process. As the reform of the intelligence service is under discussion in South Korea to strengthen its human intelligence (HUMINT) capabilities to better access information of value in North Korea, the way for reforming HUMINT operations should be focused on providing stories—beyond gathering information—to be discussed and exerting an influence on the consensus-building process among decision-makers in Pyongyang. Anything taken for granted by North Korea does not change the cognitive and intuitive the mind-set of its leaders. We have to ‘educate them to learn from us’ through HUMINT operations.

Second, if North Korea decides to sit at the table with Korea or the U.S., what can we discuss with North Korea to change a negotiation paradigm, while not going back to the status-quo? Among several options for North Korea—probably in consultation with China—is to hold a separate dialogue regarding different issues with South Korea and the U.S. respectively. To U.S. policymakers, this is a dangerous option, to sit back and watch a dialogue between the two Koreas regarding issues such as nuclear and missile development and proliferation. To South Korea, a top priority is to resume the operation of the Kaesong Industrial Complex. Last month, South Korea’s Ministry of Unification introduced an ambitious plan to attract foreign investment in the Complex and further transform it into an international complex. From the founding spirit of the Kaesong Industrial Complex for mutual economic benefits, it was regrettable that the Ministry of Unification did not articulate how such a plan would be helpful for the North Korean regime at the same time. After all, what is going on now seems to return to the status-quo rather than a paradigm shift.

Third, the Park administration needs to explore a new partner for supplementing its efforts toward building political and economic confidence with North Korea to overcome the realistic limits of cooperation with the U.S., China, and Japan. An opportunity to work with a new partner would create the chance to intensify a multi-directional approach to North Korea. The new partner should be one who can exert an influence on North Korea and at the same time be relatively free from North Korean provocations. In this regard, the EU is potentially a very appropriate partner. As the EU has a strong and strategic relationship with the U.S. and China, the EU could be a reliable and sustainable broker between the two Koreas, hopefully the U.S. and China as well. President Park Geun-hye visited North Korea in 2002 under the auspice of the Korea-Europe Foundation.

Fourth, while discussing what to do with North Korea, South Korea should develop a realistic assessment of how the tension on the Korean Peninsula affects the strategic competition in Asia between the U.S. and China. Chinese officials recently expressed their serious concerns about U.S.’s recent military demonstration—both air and naval power—in responding to North Korea bellicose threats. Although the U.S. and China have a different strategic perspective in dealing with North Korean issues, they share a common view on North Korean issues in regards to how to protect and increase their own national interests, particularly in Northeast Asia.

It is not certain whether this common denominator among the two global powers is helpful for South Korea’s strategic interests. As it is incredibly difficult for South Korea to reduce the perspective gap between the U.S. and China, South Korea needs to find and expand common interests with the U.S. and China respectively in negotiating with North Korea while increasing cooperation among the three players. This balancing effort between the two superpowers should be one of key strategic guidelines for implementing President Park’s Trust-building Process on the Korean Peninsula.

Lastly, it should be noted that Americans do not have a clear understanding about what President Park’s Trust-building Process is and how it is different from former policies.  Through the recent Korea-US Foreign Ministers’ Meeting on April 12, the U.S. welcomed the process. Such diplomatic rhetoric does not necessarily mean that the U.S. supports the new initiative under a common approach for the goal of peaceful denuclearization. What the two nations can do together is still to be seen. In a similar vein, the upcoming trilateral Korea-China-Japan summit talks in Seoul would be the first official venue for discussing the initiative among the three leaders together. Some argue that building a trilateral cooperative mechanism among the three nations for the peace and prosperity of the Korean Peninsula might be more challenging than achieving a similar goal among Korea, the U.S., and China.  The reason is that China and Japan do not have significant common ground to cooperate.

President Park Geun-hye faces a tough and challenging deadlock with North Korea. The same is true for North Korea’s leaders. In continuing negotiations with North Korea, the current situation should not been viewed as a matter of ‘strategic patience’, but as a rare chance of ‘taking steps toward paradigm shift.’ Adhering to strategic patience will at best control the escalation of tensions, while not resolving issues with North Korea.

Mr. Jinho Park is a Legislative Aide to South Korean Legislator Jinha Hwang of the ruling Saenuri Party, also a non-resident fellow of Korea Defense & Security Forum (KODEF) in Seoul.

Photo from Joseph A. Ferris III’s photostream on flickr Creative Commons.

As often happens with North Korea, there have recently been suggestions that the regime may be interested in engaging in economic reforms. The latest hopes spring from the appointment of Pak Pong-ju, a noted economic reformer, as prime minister and the replacement of most ministers of industry with officials believed to have been part of a task force established by Kim Jong-un to revive the economy. In conjunction with the appointments, Pyongyang announced a dual track policy of building the economy while also enhancing its nuclear weapons program. However, it would be premature to assume that these are true signs of a potential economic opening.

For years, the Chinese have been encouraging the North Koreans to follow their path to reform with little success. After the passing of Kim Jong-il, there were hopes that Kim Jong-un would embrace reform. Shortly after taking power, he remarked that North Koreans should “never have to tighten their belts again” and later that fall told a delegation from China that he was focused on “developing the economy and improving people’s livelihoods.”

However, in contrast to North Korea’s pledges to conduct this past December’s satellite launch and their third nuclear test, there has been relatively little follow through on the economic side. Over last summer and fall, expectations built that North Korea would engage in limited industrial and agricultural reforms. When North Korea announced that it would convene its parliament last September, there were hopes that it would announce economic reforms designed to introduce incentives for producers to increase   production and allowed select factories more say in what they produced and how. If successful, the reforms would be spread to the whole economy.

At the same time, North Korea mooted the possibility of agricultural reforms. A small number of farms would be allowed to sell portions of their harvest in markets. If successful, the experiment would be spread to the rest of the agricultural sector. However, the test cases did not take place, as harvests disappointed and feeding the military was seen as a priority. At best those reforms have been put off, if not shelved completely.

The prospects for current reforms also look doubtful. Shortly after announcing its new economic policy and shuffling cabinet officials, North Korea proceeded to close the border with South Korea and prevent the flow of goods and people into the Kaesong Industrial Complex.  While the tactic is not new, it is also not the step of a regime that takes economic development seriously.

Further complicating the situation at Kaesong, North Korea announced that it “will temporarily suspend the operations in the zone and examine the issue of whether it will allow its existence or close it.” This additional action, if North Korea follows through, is unprecedented. The current border closing had already forced at least 13 South Korean businesses to suspend operations, and if North Korea follows through and removes its workers, the other 110 companies located in the industrial zone would also have to suspend operations.

While all of the South Korean businesses operating in Kaesong face short term losses, North Korea’s actions could also impact the long term prospects of the industrial zone and its own economic reform measures. Businesses, especially the foreign investment that would be needed revive the North Korean economy; require stability and assurances that their access to goods and services will not be cut off at the whim of the government.

Prior to the announcement on Kaesong, there had been speculation in the South Korean press there were divisions within the regime on what steps to take next, with the press reporting that the military was strongly pushing for Kaesong to be closed, while the party supported maintaining the complex. Even if this is not the case, Pyongyang’s actions at Kaesong cast doubt on the prospects of there being a consensus to move towards reviving the economy in North Korea.

Additionally, Pyongyang’s unfriendly business policies do not just extend to South Korea. While North Korea has an investment law in place, it does not always apply even to its allies. Last fall the Chinese firm Xiyang Group went public with its story of being cheated out of a $37.1 million investment in North Korea. It claims that it is but one of dozens of Chinese firms that have experienced similar problems. Efforts at developing an industrial complex similar to Kaesong along the Chinese border have also been slow moving.

If North Korea is to take substantive steps to revive its economy and move towards normal economic growth, it will have to move beyond taking arbitrary and capricious actions. It will need to move towards the rule of law, which at the same time would constrain the power of the current regime. This would allow markets to take hold, for which the regime would have to commit to refraining from actions such as the 2009 currency reform that was designed reign in the markets and reduce the profits made by traders. The regime will also need to accept the development of alternative centers of power as lower and mid-level functionaries in the regime, and over time those not associated with the regime, acquire wealth and influence through their business ventures. This would also require Pyongyang to move beyond its tactics of using escalating tensions to illicit aid and concessions from other nations.

Under Kim Jong-il, these were steps the regime was unwilling to take for fear of suffering the same fate as the communist regimes of Eastern Europe and there were few signs of the regime being voluntarily willing to loosen its hold on the country. During periods of famine and when the public distribution system would break down the regime would tolerate the emergence of markets, but it also would push to scale them back as circumstances changed. It is unclear if Kim Jong-un and his advisors view the situation the same, but the pattern to date is much like his father’s, military strength is favored over economic reform.

If the regime is still reticent to undertake economic reforms, the recent move by Pyongyang to again stress the importance of reviving the economy may be a tactical move. Having previously written into its constitution that it is a nuclear weapons state and recently announced that its nuclear weapons are the “nation’s life” and will not be traded for “billions of dollars,” North Korea needs a means through which to deescalate the current crisis and a path for future talks with the United States, South Korea and others. If its nuclear weapons are truly off of the table, Pyongyang needs a basis for future negotiations. By restarting its nuclear facilities and offering the prospect of economic reform, North Korea may be trying to establish a baseline for future talks where it offers the prospect of a reformed economy for the price of its nuclear facilities, but not its weapons.

In light of North Korea’s past failures to follow through with real economic reform measures, the recent announcements by Pyongyang should be viewed more as a tactical move than a shift in policy. Rather than hope that North Korea has turned a corner on reform, a more prudent course would be to determine if North Korea follows through on proposed reforms and adjust accordingly. Unfortunately, the actions at Kaesong do not make this look likely. However, if Pyongyang were to implement genuine economic reform measures, the United States and South Korea should be prepared to take actions that would reinforce those reforms.

Troy Stangarone is Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.

The early results for trade in goods which saw an immediate tariff elimination or reduction from the KORUS FTA have been positive. Through the first ten months (the most recent data available) exports of U.S. products that have seen tariff reductions are up 2.2 percent.  For example, sales of U.S. autos are up nearly 50 percent, while exports of U.S. agricultural products have seen strong growth with sales of products such as oranges up more than 30 percent and almonds nearly 60 percent. However, products that did not immediately benefit from the KORUS FTA saw a decrease in exports to Korea by nearly 17 percent as economic growth in Korea slowed in 2012. This helps explain the increase in the overall U.S. trade deficit with Korea, along with the still sluggish global economy.

At the same time, the United States has done well on the services and investment side of the ledger. Exports of U.S. services to Korea are up more than 10 percent, while Korean investment into the United States over the first three quarters of 2012 was $4.8 billion, nearly $3 billion more than U.S. investment into Korea.

With growth in Korea slowing down due to a broader slowdown in the global economy, it is impressive that U.S. exports have continued to grow at a modest rate. However, it is important to keep in mind that first year data for any agreement is inconclusive as the results are highly susceptible to short term economic conditions. A better gauge of the agreement’s success will come in the years ahead when the agreement will be more fully in effect and data is less susceptible to short term factors such as global economic slowdowns or fluctuations in companies purchasing.

To learn more about how to utilize the agreement go to the United States Trade Representative’s KORUS FTA page or visit U.S.-Korea Connect.

Watch the recorded video of the event here:

Photo from Scott Hess’ photostream on flickr Creative Commons.

KITA data reveals that over time, South Korea is undergoing an increasing level of trade polarization (i.e. greater degrees of trade imbalances) vis- à-vis its trading partners.  China and Japan are the most extreme examples of this phenomenon with significantly more goods being exported to China than is imported, and vice versa for Japan.

A deeper look reveals the same trend (though less dramatic) with traditionally smaller trading partners beginning in the early 1990s, which gradually increases into the 2000s.  Also, notice the impact of economic crises on South Korea’s trade balances in 1998 and 2008 and their subsequent effects.  As KEI analyst Troy Stangarone points out, crises may serve to amplify and accelerate certain trade trends given the sudden and dramatic devaluations of the Won that occur as a result of the crises. Finally, this graph also highlights the one-sidedness of South Korea’s trade with the Middle East whose exports to Korea are uniformly non-renewable natural resources, namely petroleum and natural gas products.

With respect to the balance of trade, South Korea increasingly imports far more of these resources from its Middle Eastern partners than it exports, particular from Saudi Arabia, Qatar, and Kuwait.  (For a deeper analysis of South Korea’s trade with the Middle East, see this report by Alon Levkowitz: The ROK and the Middle East: Economics, Diplomacy, and Security)

Photo from kenjonbro’s photostream on flickr Creatiive Commons.