Tag Archive | "Kaesong Industrial Complex"

The Year of the Unexpected: A Look Back At the Korean Peninsula in 2016

By Troy Stangarone

In the Chinese zodiac, 2016 is the year of the Fire Monkey. Fire Monkeys are said to be ambitious and adventurous, as well as irritable. Despite Donald Trump’s not having been born in the year of the Monkey, looking back, his victory in the U.S. presidential election that year may yet seem fitting. However, rather than being a year reflective of the characteristics of the Fire Monkey, 2016 might be better known as the year of unexpected events around the world and on the Korean peninsula. Whether it was the British vote to leave the European Union in June or the impeachment of the South Korean President Park Geun-hye in December, 2016 will be remembered for a series of unexpected events and the questions they have raised about how they may shape the future.

As we take our annual look back at the events that helped to shape the Korean peninsula during the past year, it is also an opportunity to review the events we highlighted on The Peninsula in our annual 10 Issues to Watch For on The Korean Peninsula in 2016 blog. For a year that was dominated by such a large number of unexpected events, our annual look ahead to the events of the coming year holds up surpassingly well. However, while our look ahead was correct on the importance of many events in 2016, those same events also often played out in surprising ways that will have significance beyond what we expected earlier this year. One example of this is the U.S. presidential elections. While U.S. elections always hold significance for the Korean peninsula, few foresaw the election of Donald Trump and the implications his presidency could have for the peninsula early in 2016.

With that said, here’s a brief look back at the 10 issues we highlighted and what happened:

  1. No Significant Progress with North Korea – After North Korea began 2016 with a nuclear test, the international community moved towards placing greater pressure on Pyongyang. This included sanctions at the UN, which would later be strengthened, to cut off North Korea’s trade in minerals such as coal, and bilateral sanctions by the United States to cut North Korea off from the global financial system. As was expected at the time little progress was made with North Korea on resolving the nuclear issue, but the one surprising element was that rather than try to find a way to engage North Korea after a new round of sanctions, South Korea went all in on pressuring the North with the closure of the Kaesong Industrial Complex and lobbying countries to cut their ties with Pyongyang. While we were right on the broader element of there being little progress with North Korea and how structural issues such as the U.S. elections and sanctions would inhibit progress, the strength of South Korea’s stance was one of the unexpected turns of 2016.
  2. If There Will Be Another Round of Family Reunions – If there was going to be progress in relations between North and South Korea it was going to require both countries to separate the nuclear issue from other issues in their relationship. Neither side was able to do so in 2016, which is regrettable for both the humanitarian burden that it places on the divided families and for the reality that family bonds will be one of the important ingredients for unification if it takes place at some point in the future. The longer that families remain divided the further apart the two Koreas are likely to drift.
  3. Could a China-North Korea Summit Still Happen? – This is one issue that was fairly straight forward. While there had been suggestions in late 2015 that Chinese President Xi Jinping might finally meet Kim Jong-un thanks to improving relations, the nuclear test in January ended what little chance there may have been for a China-North Korea summit.
  4. Korea-Japan Relations – When looking at Korea-Japan relations heading into 2016, clearly there had been prior progress. At the same time, it seemed unlikely that there would be the type of progress that the U.S. might have liked and the prospect for backsliding existed. While Japan did approve money for the comfort women fund, the agreement itself remains controversial in South Korea and may face pressure under the next administration. As for the comfort woman statue near the Japanese Embassy, it remains an issue for the local government of Seoul. While progress was made in relations, unsurprisingly, much work remains.
  5. How the U.S. Elections Could Impact Policy – Here we were right about how the political parties viewed the situation in Korea, but wrong about the overall impact of the elections. While we foresaw the critiques of the Obama administration’s policy and the push back on issues such as the Trans-Pacific Partnership (TPP), the degree to which then candidate Donald Trump would shift the debate with his repeated push on the question of South Korea’s contributions to U.S. troops on the peninsula, and suggestions that the U.S. might withdraw those troops and allow South Korea to develop its own nuclear weapons, and that a candidate with these views would win the presidency, were clearly unforeseen. The ultimate result of the election is potentially much more significant for the peninsula than anyone might have imagined at the beginning of the year.
  6. South Korean National Assembly Elections – Here we saw the fairly divided electorate give the opposition Minjoo Party a slim majority and a display of surprising strength by Ahn Cheol-soo’s new People’s Party. However, the impeachment of Park Geun-hye likely means that any signals the National Assembly elections may have had for the presidential election in 2017 no longer matter.
  7. Cooperation Between Korea and China in the G20 – At the G20 in China, South Korea worked with China as expected to help advance the agenda, but IMF quota reform and global safety nets played less of a role than expected during 2016.
  8. K-Pop’s Next U.S. Breakthrough – While K-Pop and Hallyu more generally remained popular in much of the world, especially with the release of Descendants of the Sun, K-Pop continued to have difficulty breaking into the U.S. market. The English language debut of CL, Lifted, was expected to give K-Pop its first breakout in the U.S. since Psy, but the album has yet to produce a chart single in the United States.
  9. South Korea’s Trade Policy – Events on the trade front have played out largely as expected. While TPP, should it be revived, will be an issue for the next Korean administration, there has been significant progress on the Regional Comprehensive Economic Partnership (RCEP) talks that include the ASEAN, China, India, Australia, New Zealand, Japan, and South Korea.
  10. Has Samsung Turned the Corner? – After two difficult years Samsung had turned the corner in 2016 with the successful launch of the Galaxy 7 and the new Edge. However, all of Samsung’s progress melted down with the battery issues of the Galaxy Note 7. As a result, next year will again be a key year for Samsung as it once more looks to turn another corner and rebuild consumer confidence after the issues with the Note 7.

Beyond the events that we expected, here is a look at some of the unexpected events that helped to shape 2016:

  1. Multiple Nuclear Tests and the Advancement of North Korea’s Nuclear Program – Before we even published our look ahead to 2016, North Korea had conducted its first nuclear test of the year. It would go on to break with its pattern of only conducting a single test in a year by conducting a second nuclear test in September. While much attention has focused on the significant increase in North Korean missile launches and tests in 2016, the most significant step may have been in the advances the program took in developing a second strike capability. Though initial tests of a submarine launched ballistic missile failed, North Korea had made progress before the year’s end.
  2. The Closure of the Kaesong Industrial Complex – South Korea took the unexpected step of closing the Kaesong Industrial Complex in response to North Korea’s first nuclear test in 2016. The closure was significant for several reasons. Not that long beforehand South Korea had been pushing to internationalize the complex to avoid the prospect of the complex being shut down after North Korea had withdrawn its workers in 2013 for political purposes. Kaesong also held symbolic importance as the last remaining connection between North and South Korea, as well as the last vestige of the prior sunshine policy. While closing Kaesong was a significant step it may have played a role in encouraging the international community to take stronger steps against North Korea.
  3. International Sanctions on North Korea – While there is nothing necessarily surprising about the international community sanctioning North Korea over its nuclear test, what is significant about the current round of sanctions are the steps that they take to try and limit North Korea’s ability to continue its nuclear program. There are now requirements to inspect North Korean cargo, even that of North Korean diplomats, and caps have been placed on North Korean exports of coal while bans have been placed on other mineral exports. The United States has moved to cut North Korea off from the international financial system and has set in place steps to use secondary sanctions to go after those who enable North Korea. While sanctions are unlikely to resolve the North Korean nuclear issue on their own, they were significantly strengthened in 2016.
  4. The Political Crisis in South Korea – The corruption and influence peddling scandal surround Choi Soon-sil, a longtime confidant of President Park Geun-hye, engulfed South Korea is a political scandal that has seen millions of South Koreans protest in the streets and the impeachment of Park Geun-hye by the National Assembly. As a result of the scandal, South Korea faces an uncertain political future in 2017. Even before the new year begins, there has already been a split within the conservative Saenuri Party with 29 members leaving to form the New Conservative Party for Reform.
  5. THAAD and Dispute with China – Beyond sanctions, one of the steps being taken by the United States and South Korea to deter aggression by North Korea is the deployment of the Thermal High Altitude Arial Defense, or THAAD. This is a step that has been strongly opposed by China which sees it as undermining Beijing’s own interests in the region. While the evidence seems thin to date that China has actually done anything more than complain, there have been concerns that China will retaliate economically against South Korea by restricting its exports of Hallyu to the China and Chinese tourism in South Korea.  Taking such steps would harm Chinese as well as South Korean interests.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Gage Skidmore’s photostream on flickr Creative Commons.

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February 2016: Shutting Down Kaesong…and inter-Korean relations?

By Nicholas Hamisevicz 

February was another difficult month for inter-Korean relations. After a nuclear weapons test in January, North Korea then conducted a satellite launch that also served as a ballistic missile test. The Park Geun-hye administration in South Korea closed the Kaesong Industrial Complex (KIC) in response, leaving no continuous projects or connections left for inter-Korean cooperation.  After punishments through sanctions by individual countries and by the international community through the United Nations Security Council resolution, South Korea will have to figure out how it will engage North Korea, if at all. The two Koreas have made it through troublesome times at the beginning of the year before, but with more factors being added to the mix each month, this period during the first quarter of 2016 could be the toughest challenge yet for the Park Geun-hye and Kim Jong-un.

North Korea launched a rocket carrying a satellite that appears to have made it into orbit on February 7. Once again, this launch was viewed as attempt to test ballistic missile technology. Three days later, the Park Geun-hye administration announced that it was suspending operations of the KIC because North Korea was using the funds to support its nuclear and ballistic missile programs.

As KEI’s Troy Stangarone elucidated, it doesn’t look likely that the Park Geun-hye administration will attempt to reopen Kaesong. Increasing the grimness of the outlook is the fact that North Korea seemed unimpressed by any inter-Korean related cooperation project put forward by the Park administration. North Korea barely agreed to family reunions. It has only been through many negotiations and tension relieving measures that the two Koreas have had family reunions twice under Park Geun-hye and Kim Jong-un. The reopening of tours from South Korea to Mount Kumgang in North Korea had no chance, as South Korea wants security guarantees for its citizens and apology by North Korea over the death of a South Korean who was killed during a visit. North Korea desires to have South Korea re-pay for everything and re-start the tours immediately. Park Geun-hye’s peace park idea along the DMZ doesn’t appear to have been seriously considered by North Korea either. The cooperation effort between South Korea and Russia to ship Russian coal through North Korea’s Rajin port was slow and has currently been suspended as well by South Korea.

Thus, since there is currently no inter-Korean cooperation projects in operation, conceivably any idea could be brought forward as an option. However, it is also likely that whatever ideas is put forward by South Korea, either by Park Geun-hye or her successor, North Korea’s price for agreeing to the arrangement will be much higher to make up for lost revenue and to get back at South Korea.

In order to get to a point where the two Koreas can even consider negotiating over a new inter-Korean cooperation project, they must get through these first five months, and likely, a much longer stretch of time as well. Even with the stakes seemingly much higher now without any inter-Korean cooperation project, the two Koreas under Park Geun-hye and Kim Jong-un have made it through this complicated part of the year before. In 2013, North Korea denied access to Kaesong and operations had ceased for five long months. Last year, North Korea demanded higher wages for the workers at Kaesong, setting off more intense negotiations. Moreover, the arrest of a South Korean student by North Korea made things difficult for inter-Korean relations.

Although Kaesong continued in these instances, the two Koreas can make it through the next few months. There has already been tough talk and provocative moves of small rocket fires and cyber attacks by North Korea. However, both sides have the ability to manage the tensions in a way that can get the countries to late May without a detrimental conflict. By then, North and South Korea could be in a more positive environment to address the possibility of some constructive interaction or at the very least a stalemated atmosphere of no engagement, positive or negative.

It has been normal for contentious rhetoric and little contact to occur between the two Koreas during the first quarter of the year. However, after the first two months of 2016, the new normal now appears to be no substantive contact between North and South Korea for the last year and a half of the Park Geun-hye administration. Despite making it through the first few months of the year in the past, both Koreas will have to work harder than before to reduce the possibilities of the lack of contact being accompanied by provocative actions throughout the rest of the year.

Nicholas Hamisevicz is currently undertaking a PhD in World Politics at Catholic University. Previously he was the Director of Research and Academic Affairs for the Korea Economic Institute of America. The views here are the author’s alone. 

Photo from Chris Marchant’s photostream on flickr Creative Commons.

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Relations between North and South Korea Hit Rock Bottom

By Mark Tokola

Make no mistake, South Korea’s shuttering of the Kaesong Industrial Complex (KIC) which it had operated just across the border in North Korea since 2004 is a big deal.  Far from being a commercial venture of marginal overall economic importance to the two countries, it has been a powerful symbol that no matter how bad relations have at times been between North and South Korea over the past decade, there has been a small lifeline continuing to connect the two countries.  Even after a North Korean submarine sank the South Korean naval vessel Cheonan and shelled Yeonpyong Island, killing civilians, in 2010, the South Korean government did not take the step of suspending operations in Kaesong although they did temporarily suspend new investment.  The North Korean government for its part has halted operations at the KIC, including for a five-month period in 2013, but the South Korean government has never done so.  That they have done so now is a clear expression of the seriousness with which South Korean government takes North Korea’s recent nuclear and missile test.

In 2000, South Korea’s Hyundai Asan Corporation and the North Korean government signed an agreement to construct an industrial zone in North Korea at which South Korean companies would employ North Korean workers to assemble products from parts sent up from South Korea.  The Kaesong Industrial Complex began operations in 2004.  In the years since, the South Korean government and companies have invested $854 million in the KIC, 124 companies have begun operations there, and KIC employment reached 54,000.  The workers were selected by the North Korean government and wages were set by negotiation.  The terms under which the KIC has operated have been the subject of contention.  North Koreans have demanded wage increases beyond the terms of the agreements and in March 2008 demanded that all South Korean managers leave the KIC.  With occasional stops and starts, the two sides have been able to find compromises to keep the KIC operating.

The two sides have derived mutual benefit from the KIC.  Although the South Korean companies that operate at the KIC do not provide detailed figures on sales and profits, it has been estimated that production in 2014 was around the level of $470 million.  Wages to the 54,000 North Korean workers were around $100 million, of which the North Korean government took a thirty-percent cut.  The KIC may have contributed 1 percent to North Korea’s low GDP.

The suspension of the KIC will cost South Korea more than North Korea, narrowly considered, but the overall economic loss to North Korea may be greater.  The 54,000 North Korean workers who will lose their jobs support another 200,000 family members.  The “middle men (and women)” who were buying and selling KIC products will miss them.  The production and management techniques that were being learned at the KIC will be lost.  Foreign companies who were considering investing in North Koreas other economic investment zones may have second thoughts.  Any notions of creating new South Korean industrial complexes in North Korea can be forgotten for the time being.

But, the political impact of suspending the KIC is greater than the economic one.  While family reunions, cultural exchanges, the Mount Kumgang resort in North Korea, Red Cross discussions, and other elements of North-South relations have been dialed up or dialed back over recent years – depending on the state of relations – the Kaesong Industrial Complex generally has kept humming away in the background as a baseline fact that North and South Korea had some kind of cooperative relationship.  When I asked a South Korean official in 2010 why they hadn’t closed the KIC after the Yeonpyong-do shelling, he said:  “We can’t do that.  It is the only thing we have left going with the North.  If we close Kaesong, we are back to where we were just after the Korean War.”

South Korea had hoped that North Korean workers at the KIC, even though they were hand-picked by the North Korean government for loyalty and reward, would receive a favorable impression of their South Korean managers and would learn that the private sector could provide a well-run and decent commercial operation.  They didn’t expect to transform attitudes in the North overnight, but believed that the KIC would plant seeds that eventually would lead to improved North-South relations.  It was an expression of hope.

For the South Korean government to now suspend the KIC shows that they believe North Korea’s nuclear and missile tests have changed the equation on the peninsula.  North Korea is pursuing offensive nuclear weaponry heedless of any international or inter-Korean carrots or sticks.  The United States and China should note that the South Koreans — the people who know the North Koreans best and have the most to gain or lose — have decided that a new phase has begun.

Mark Tokola is the Vice President of the Korea Economic Institute of America. The views expressed here are his own.

Photo from Konrad Karlsson’s photostream on flickr Creative Commons.

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January 2016: An Even Tougher Start for Inter-Korean Relations

By Nicholas Hamisevicz

The new year did not start off well for inter-Korean relations. The momentum was already moving in the wrong direction after a disappointing December. North Korea’s fourth nuclear test will now create an even larger setback for the two sides. The prospects will not get better either. Directly antagonizing one another while preparing for possible provocations or escalations dominated inter-Korean activities in January. Moreover, personnel changes in North Korea, the annual military drills, and upcoming political events in both countries suggest it will be another tough beginning to the year for inter-Korean relations.

The two Koreas didn’t have any chance to explore better ties based off their respective New Year’s pronouncements or any other hope of improving relations. North Korea’s nuclear test on January 6 has once again sent the U.S. and its allies South Korea and Japan into a mode of strengthening coordination and deterrence along with intensified diplomacy as they attempt to get tougher sanctions and more punishment on North Korea through the United Nations.

In addition to the nuclear test, North and South Korea now fear the greater possibility of provocations or escalations from each other. South Korea quickly turned back on the loudspeakers pumping out anti-North Korea propaganda along the DMZ; this move was tried following the land mine attack along the DMZ last August and drew North Korean military fire before the two sides negotiated a short settlement. This time, North Korea responded by using their own loudspeakers to spew anti-South Korean propaganda. North Korea even dropped leaflets into South Korea, a tactic usually associated with South Korean activists.

It’s not just the nuclear test and loudspeaker showdown. Both sides now seem focused on more incidents that could escalate tensions on the peninsula. Kim Jong-un is telling the North Korean troops to be prepared. Park Geun-hye warned South Koreans to be ready for provocations. Her administration even suspended permitting South Korean civilian groups to visit North Korea and limited the amount of people that could go to the Kaesong Industrial Complex inside North Korea. South Korea’s military also fired at a likely North Korean drone attempting to enter South Korean airspace. There were additional worries that North Korea was behind a possible cyber attack.

While the tensions around these provocations and potential escalations are troubling, the suspected personnel changes do not seem promising either. Kim Yang Gon, North Korea’s top official in charge of inter-Korean relations died last month in a car crash. Reports allege his replacement is General Kim Yong-chol, a leader with inter-Korean experience from the military and intelligence perspective. He has been associated with the sinking of the Cheonan, the shelling of Yeonpyeong Island, the Sony hack, and possibly even the land mine incident last August. If Kim Yong-chol does have more inter-Korean responsibilities, these experiences do not bring confidence for better engagement between the two Koreas.

The beginning of the year is usually tough for inter-Korean relations because of the annual military exercises conducted by South Korea and the United States each spring. This year, political events in both countries could make it even more difficult for inter-Korean interaction. North Korea is preparing for a Party Congress in May, the first since 1980. With suspected personnel changes and a greater ability for Kim Jong-un to make larger fundamental policy changes in the country, the North Korean government will want to make sure nothing interrupts this important occasion. South Korea will have legislative elections in April, which will determine what type of National Assembly Park Geun-hye will have to work with for the last two years of her presidency and could give some indication of political issues for potential South Korean presidential candidates.

Once again, the two Koreas have many factors stacking up that further complicate efforts for better inter-Korean relations. The two sides have made it through difficult starts to the year before; last year was a good example. In 2016, though, a nuclear test, more potential provocations, personnel changes, and political events make that challenge of getting past the military exercises much more difficult. The elections in South Korea in April and the Party Congress in North Korea in May could extend that timeline for potential interaction if North and South Korea can overcome the provocative measures taken since January 1. Not a good start, which means a higher likelihood of more negative and dangerous inter-Korean relations in early 2016.

Nicholas Hamisevicz is currently undertaking a PhD in World Politics at Catholic University. Previously he was the Director of Research and Academic Affairs for the Korea Economic Institute of America. The views represented here are his own.

Photo from fresh888’s photostream on flickr Creative Commons.

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November 2015: Bookended by Military Operations, Talks Move Forward in Inter-Korean Relations

By Nicholas Hamisevicz

In November, both Koreas continued to demonstrate a willingness for inter-Korean contact while also maintaining a commitment to improve security. Military actions over the past few months have not scuttled opportunities for dialogue. Inter-Korean talks in November led to scheduling talks set for December 11 at the vice minister level. The two sides will now have to consider further whether the possibilities of cooperation outweigh security concerns.

On the positive side, the two Koreas were able to meet on November 26 to discuss possibilities for a higher-level meeting in the future. Both Koreas are still trying to implement parts of the August 25 agreement that was made following a month of increased tensions. In early August, two South Korean soldiers were injured by land mines at the Demilitarized Zone (DMZ); the South Korean government said that the land mines were recently placed along the border by North Korea and responded by reinstituting the process to pump propaganda broadcasts over the DMZ into North Korea via loudspeakers. In October, North and South Korea were able to conduct family reunions, checking off one aspect of the agreement. The two sides are now working on another section of the August 25 agreement in which the two Koreas promised they would hold high-level talks.

At the November 26 meeting, the two Koreas agreed to hold vice-minister level talks in Kaesong, North Korea on December 11. It appears that North Korea would like to discuss the possibility of resuming suspended tourism operations to Mount Kumgang in North Korea as part of this dialogue. South Korea seems to want an arrangement for regularized family reunions and high-level inter-governmental meetings between the two Koreas. Different agenda items at this stage shouldn’t be surprising; however, separate aspirations could make it more difficult to reach an agreement.

In addition to the governmental talks, the two sides also had smaller exchanges in November. South Korean National Assembly members were allowed to take a day trip to Kaesong to visit ancient Korean burial sites. After an initial ban, South Korean officials associated with the running of the Kaesong Industrial Complex were permitted back into North Korea. Similar to a visit to North Korea by South Korean Catholic priests in October, Buddhist leaders from both Koreas were able to meet in Kaesong. Lastly, North and South Korean cooperation with Russia in regard to bulk cargo shipping moved forward with further tests for getting Russian coal to South Korea via railroads and the port in Rajin, North Korea. These smaller interactions help create an environment of regular contact and were supplements to the higher-level inter-Korean meeting.

Despite these signs of progress, the two Koreas continued to conduct military operations that could easily give either side an excuse to cease further interactions. Three days before the November 26 talks with North Korea, the South Korean military engaged in artillery exercises to coincide with the anniversary of North Korea’s shelling of Yeonpyeong Island. North Korea subsequently threatened South Korea and argued that the artillery drills might prevent North Korean officials from attending the talks. The Park administration went ahead with the exercises regardless. President Park even emphasized that strong security is an important part of her administration’s policy to build better inter-Korean relations.

Two days after the November 26 meeting, North Korea demonstrated its continuing plans to develop a submarine-launched ballistic missile capability. Having claimed a successful underwater missile test in May 2015, it conducted another test on November 28. As he did for the earlier test, Kim Jong-un was believed to have attended this launch as well. U.S. and South Korea media reports cited intelligence officials as saying that the test was not an overall success.

November 2015 was another month that demonstrated that the two Koreas could carry out positive interactions while at the same time bolstering their defenses. Shortly before and after the inter-Korean talks on November 26, both Koreas conducted military operations that could be interpreted as threatening, giving either government a reason to move forward cautiously, or to stop progress altogether. Can the two Koreas continue to have exchanges within the context of military enhancements by both sides? The vice-ministerial meeting on December 11 and other events in December will be key to determining whether sustained interaction between North and South will continue.

 Nicholas Hamisevicz is currently undertaking a PhD in World Politics at Catholic University. Previously he was the Director of Research and Academic Affairs for the Korea Economic Institute of America. The views represented here are his own.

Photo from Morning Calm Newsletter’s photostream on Flickr Creative Commons.

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August 2015: Shooting, Shouting, and Negotiating in Inter-Korean Relations

By Nicholas Hamisevicz

The Demilitarized Zone (DMZ) is a fixture that constantly symbolizes the unresolved tension between the two Koreas. That tension came crashing into plain view in the recent standoff between North and South Korea.  In early August, landmines along the DMZ suspected to be recently planted by North Korea injured two South Korean soldiers, which in turn led to South Korea turning on loudspeakers to pump in propaganda across the border. In response, the North Korean military shot at the loudspeakers and threatened additional force if the speakers were not removed by the evening of August 22. Shortly before the deadline, North Korea requested talks with South Korea, and after days of negotiation, the two sides came to a six-point agreement.

Like the standoff over the Kaesong Industrial Complex (KIC) when North Korea pulled its workers in April 2013, the Park Geun-hye administration was able to stand firm and bring North Korea to the table. Park Geun-hye came out of the Kaseong situation with relatively positive support, and it appears the same has happened after the current tensions at the DMZ. Following both negotiations, her administration has tried to use that backing and supposed leverage to push for elements they believe can be the foundation for trust between the two Koreas. Despite getting an understanding with North Korea that contains some of those factors for trust after this latest showdown, there is still a possibility that efforts by the Park administration will be again stymied by North Korea.

The Kaesong standoff was Park Geun-hye’s first test of brinksmanship by North Korea that directly impacted inter-Korean relations. By not chasing after North Korea in an attempt to have it return its workers to the complex, and even proactively moving the process forward for companies to withdraw from Kaesong, the Park administration was able to get North Korea to the negotiating table. Key features from the talks and return to normalized operations were the two Koreas having joint committees to better manage the KIC and prevent another North Korean forced work stoppage from occurring as well as the ability to bring in investment from international companies.

The Park Geun-hye administration has pushed these two elements when discussing Kaesong. The internationalization effort has been limited to one German company, and as KEI’s Troy Stangarone points out, there is a slight caveat as the company sells to the South Korean firms in the complex rather than producing anything in Kaesong. Moreover, in attempts to use the joint committee for discussions on running Kaesong, North Korea has either boycotted the meetings or tried to unilaterally force changes like removing wage caps and increasing the wages of the workers despite the earlier agreed upon rate. Thus, even with the seemingly upper-hand from those negotiations, North Korea has blocked those avenues of trust Park Geun-hye was trying to build.

Park Geun-hye was also trying to get regularized family reunions scheduled as another way to develop inter-Korean trust. The Park administration has often insisted that family reunions come first, and then other aspects of the relationship could be explored. Within the recent agreement, the statement “The north and the south agreed to arrange reunions of separated families and relatives from the north and the south… and continue to hold such reunions in the future…” seems to indicate that the Park administration finally has in writing a statement committing North Korea to continuous family visits.

The two sides agreed to meet on September 7 to discuss the next family reunions; however, North Korea has previously backed away from scheduled family reunions under the Park Geun-hye administration. Thus, while the acceptance of family visits is an immediate win for the Park administration, it can’t be seen as an inevitable occurrence because of the North Korean government.

Another interesting aspect from the settlement is that Park Geun-hye is trying to utilize her improved relations with Beijing for leverage over North Korea in inter-Korean relations. The Park administration has improved South Korea’s bilateral ties with China, and despite the optics of attending a military parade in the country that last invaded Korea, Park Geun-hye traveled to China to watch the ceremony and met with Xi Jinping. Some of the analysis on her decision to go suggests that she feels she can garner additional support from Beijing for how she is handling inter-Korean relations. President Park even praised China for helping diffuse the tense situation on the Korean peninsula. Thus, Park Geun-hye could possibly be banking on her relationship with Xi Jinxing to help provide the needed support and pressure for her trust building efforts with North Korea.

After what could have been a dangerous escalatory situation between the two Koreas, negotiations allowed both sides to deescalate the situation. The outcome from those intense talks was a statement that illustrated once again some of the main elements that Park Geun-hye administration has tried to use in her trustpolitik policy toward North Korea. In previous understandings, North Korea has blocked the Park administration’s attempts to use those aspects of the agreements for improving inter-Korean relations. Family reunions have been an avenue of engagement South Korea has tried to use to create a better environment between the two countries, and there is a real possibility it could happen again with these upcoming family visits as well. The tension seems diffused for now, but there is always next month.

Nicholas Hamisevicz is currently undertaking a PhD in World Politics at Catholic University. Previously he was the Director of Research and Academic Affairs for the Korea Economic Institute of America. The views represented here are his own.

Photo from Expert Infantry’s photostream on flickr Creative Commons.

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July 2015: Summer Heat Only Leaves the Small Stuff in Inter-Korean Relations

By Nicholas Hamisevicz

When it’s a hot summer day in July, one often has to make the strategic calculation of what particular circumstances would require one to leave the friendly confines of a place with working air conditioning. Similarly, it seemed the two Koreas were only going to deal with each other during July under specific conditions. Consistent with many of the interactions in inter-Korean relations recently, the two sides had some significant disagreements that overshadowed the few positive interactions. There’s hope that the 70th anniversary of the end of Japanese occupation of the Korean peninsula in August will provide another context for exchanges; however, the political environment suggests that inter-Korean relations will be more on a shorter term, project-to-project basis rather than on a consistently sustainable basis.

For the two Koreas, there were plenty of reasons not to step outside their current comfort zones and engage in a more meaningful way. The month started off with North Korea boycotting the Universiade Games that took place in Gwangju, South Korea; the reason was believed to be in protest of the United Nations human rights office being set up in Seoul to collect evidence of North Korean human rights violations. Despite Kim Jong-un emphasizing the importance of sports for North Korea, the possibility for another inter-Korean meeting similar to the one at the end of the Incheon Asian Games last year vanished. In addition, despite production at the Kaesong Industrial Complex increasing, the two sides still had trouble with the negotiations over wage disputes. Lastly, North and South Korea bickered over the repatriation of North Korean fishermen whose boat drifted into South Korean waters. South Korea repatriated two of the fishermen but said the other three truly wanted to defect to South Korea.

However, the two Koreas were able to have some smaller slices of interaction. A main effort in July was the two countries working together to study the “abnormal symptoms” that were being displayed by the pine trees in the Mount Kumgang area of North Korea. This forestry effort, along with reports that universities in South Korea, China, and North Korea will share reforestation data and information, provided that small opportunity for positive inter-Korean relations. There is also hope that there will be more interaction soon. The widow of former South Korean President Kim Dae-jung, Lee Hee-ho, is scheduled to travel to North Korea in early August. There is also hope for a possible joint celebration of the 70th anniversary of the end of World War II and the Japan’s occupation of Korea.

July was another month of relatively limited interaction between North and South Korea and no clear possibility for large scale engagement. The disagreements still seem rather contentious and the positive exchanges weren’t significant enough to change the larger calculations between the two sides. Individual joint Korean projects like the forestry cooperation might have to be the way forward for now until a better overall framework and sentiment allows for a more fully, consistent, and sustainable platform for inter-Korean relations.

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

Photo from Mike Rowe’s photostream on flickr Creative Commons.

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March 2015: Backwards Steps in Inter-Korean Relations

By Nicholas Hamisevicz

March was expected to be a difficult month for inter-Korean relations with the joint U.S.-ROK military exercises taking place and the lack of progress between the two Koreas in January and February. Unfortunately, events in March suggest even more difficult times ahead for relations between North and South Korea even without military exercises occurring. Across the economy, human rights, and security fronts, North Korea pushed and prodded South Korea to try to gain an advantage and prevent perceived attempts by South Korea for unification by absorption. The scheduled ending of the U.S.-ROK military exercises on April 24 may help bring about a better environment to work on these issues, but it won’t be enough. The two Koreas will need to interact at a more sustained level in order to solve the disputes that arose in March.

North Korea has once again unilaterally taken action in the Kaesong Industrial Complex (KIC) that could hurt the facility’s ability to function and damage the main avenue for inter-Korean economic exchange. The North Korean government declared that South Korean companies must increase the wages they pay North Korean workers more than the contractually agreed amount. The South Korean government has rejected the statement by North Korea about the wage hike believing that the issue should be discussed in the joint committee set up after the temporary shutdown of the KIC. Reports point to April 10 as the date when South Korean companies would have to pay the increased wage. The South Korean government doesn’t want the companies to pay and is sending a letter to the companies telling them not to comply with the wage hike. The mishandling of this issue could cause fissures between the Park administration and the businesses she is trying to woo back into Kaesong and internationalize it. In addition to the difficulties, previous agreements over Kaesong require the two Koreas to negotiate over the rent South Korean companies must pay North Korea for using the land in Kaesong.

Also concerning for inter-Korean relations is the potential difficulties ahead with human rights. In March, the DPRK revealed that it had arrested two South Korean citizens for spying. The South Korean government denies that these two people are spies and has demanded its citizens be returned. Relatively little info has come out on this situation. North Korea says these two people were arrested late last year, and the South Korean government is not saying why these two men were out of the country and on the Chinese border with North Korea.

North Korea has tried to use the detention of U.S. citizens in the past to try to gain concessions and advantages in relations; however, the detentions actually held back relations and nothing really moved forward until after the detainees were released.. For inter-Korean relations, the danger of no progress because of these detainees is potentially there as well.

With the annual U.S.-ROK military exercises during this time, North Korea often tries to demonstrate some of its abilities, argue that the exercises are preparation for war, and readies its forces for that perceived potential war.  This year is no different. North Korea fired seven ground-to-air missiles into the East Sea.

Also worrisome in the security realm is the announcement from South Korea that it was North Korea who hacked nuclear power plants and officials in the South Korean nuclear company that runs those plants. This cyber attack occurred in December, but with the findings indicating North Korea as behind the hack, it demonstrates North Korea’s cyber capabilities to penetrate multiple areas of South Korean society. Its worrisome and dangerous that North Korea is targeting important power sources in South Korea and that the potential damage from these attacks can be immediately devastating.

These strong moves taken by North Korea require significant diplomacy and deterrence by South Korea in order to work through these economic, human rights, and security issues between the two Koreas. The difficulty will be in the fact that South Korea will want to use diplomacy over Kaesong and the detainees, yet North Korea has tried to push its demands in both of these areas. While diplomacy is also important in the security realm, deterrence will still be vital for South Korea. North Korea continues to improve its missile and cyber warfare capabilities; moreover, the recent cyber attacks on the nuclear power plants illustrate how North Korea is willing to go after sensitive targets in South Korea in an attempt to create panic, confusion, and even destruction. The anticipation was for a difficult month of inter-Korean relations; unfortunately, the difficulties that did occur in March will make inter-Korean relations even more complicated in the months ahead.

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

Photo from Matt Paish’s photostream on flickr Creative Commons.

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Has the Kaesong Industrial Complex Bounced Back from the 2013 Shutdown?

By Troy Stangarone

When North Korea withdrew its workers from the Kaesong Industrial Complex in 2013, confidence in the inter-Korean venture was severely damaged. Firms in the complex lost not only production and revenue, but contracts as well. Over the last year, South Korea has sought to make the complex more resilient in the face of political turmoil on the Korean peninsula with efforts to attract foreign investors. Given the uncertainty of the complex, only the German firm Groz-Beckert has agreed to set up a sales office. While the process of internationalization may be slow, production seems to be bouncing back to normal levels.

According to new figures released by the Korea International Trade Association, inter-Korean trade rose to $2.3 billion last year. While the numbers are almost double the amount of trade from 2013 when the complex was closed for nearly half a year after North Korea withdrew its workers, more impressively inter-Korean trade is up more than 15 percent from 2012, the last full year of trade before the shutdown.

Inter-Korean Trade Since 2007

Inter-Korean Trade

Source: Author’s calculations from Ministry of Unification and the Korea International Trade Association. Figures in $100,000.

While inter-Korean trade is up, the question remains if this is a positive new trend or merely an aberration. Political tensions have often lead to slowdowns in Kaesong and a number of factors could continue to constrain growth at the complex. Access for the goods abroad is limited due to sanctions. Because most countries consider goods from the complex to be North Korean products they are not eligible for most favored nation status which would entitle them to a country’s lowest tariff. The complex still lacks the modern telecommunications access to cell phones and the internet, which modern businesses require. There also remains political risk in setting up in the complex as North Korea continues to try to arbitrarily change the rules on issues such as wages and its ability to detain South Koreans.

Despite these and other challenges, there is one significant factor that could help the complex to grow in the future. The soon to be concluded Korea-China FTA will provide access to products produced in Kaesong to the growing Chinese market. There are a few ways this could help boost Kaesong. As China shifts to more domestic consumption, duty free goods from Kaesong could become increasingly competitive in the Chinese market and thereby provide producers with a larger overall market in which to sell goods. Second, access to the Chinese market could make the complex more attractive for South Korean and international investment. However, this comes with caveats. In the case of South Korean firms, the May 24 sanctions would have to be at least partially lifted to allow further South Korean investment, and in the case of international firms the issues previously mentioned regarding communications as well as how labor is handled and wages are paid, among others, may need to be addressed before substantial international investment occurs. Lastly, depending on how the provisions in the FTA are written, collaboration between Kaesong and China’s Special Economic Zones in North Korea may become attractive.

However, if the Korea-China FTA is to help serve as a platform for expanding Kaesong, the political tensions that have held back progress in the past will need to be minimized. If North Korea truly seeks to engage in economic development and make the Kaesong Industrial Complex successful, it will need to refrain from the types of political actions it has taken in the past that have inhibited the complex’s growth.

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

Photo from Times Asi’s photostream on flicker Creative Commons.

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Another Setback for Internationalizing the Kaesong Industrial Complex?

By Troy Stangarone

One of the keys to attracting international investors to the Kaesong Industrial Complex is reducing the political risk of making an investment in the complex and providing a stable business environment. Since the reopening of Kaesong last year, only the German manufacturer, Groz-Beckert, has decided to take that risk. However, a new action by North Korea may further set back the prospects of attracting additional firms to the complex.

While the South Korean government has not yet been notified, Uriminzokkiri, the official website of the North’s Committee for the Peaceful Reunification of the Fatherland, is reporting that the North Korean government has amended the Act on the Kaesong Complex to remove the wage caps in the Kaesong Industrial Complex. Instead of having the wages capped at a 5 percent maximize increase per year; North Korea has indicated that wages will now be set by the complex’s supervisory committee.

This is not the first time that North Korea has sought to raise wages beyond their contractually agreed limits. In 2007, North Korea sought wage increases for workers with university degrees by 30 percent and those with two-year degrees by 10 percent. In 2009, North Korea threatened to unilaterally raise wages to $300 per month. In each of these instances, North Korea backed down and wages remained within the contractual limits.

Much as with last year’s unilateral shutdown when North Korea withdrew its workers from the Kaesong Industrial Complex, the decision to move to a new payment system without reaching an agreement with South Korea on the changes will likely undermine business confidence. If firms continue to see North Korea as arbitrarily instituting new rules and willing to engage in unilateral actions that would interfere with normal business operations, many firms will see the political risk as too great to invest in Kaesong.

In announcing the change, North Korea indicated that it made the decision “to enhance labor quality and productivity.”  However, rather than seeking to enforce a new wage structure on the South Korean firms in the complex, North Korea should address some of the issues that inhibit foreign investment. On the wage side, these include the lack of direct payment to workers and the ability of firms to set wages on their own. These steps would help to move the complex closer to international standards. Additionally, taking steps to free the labor market, allow firms to set wages, and paying workers directly would do more to encourage labor productivity and enhance the quality of labor in the complex than having the supervisory committee set wages.

Perhaps as with prior attempts by North Korea to increase wages beyond the current contractually agreement, and other attempts at unilateral changes such as to the tax code, North Korea will back down and reach an accommodation within contractual guidelines or a new agreement on wages that South Korea can accept. However, even if it does, continued attempts by North Korea to rewrite the rules without regard to established agreements will only undermine efforts to develop a stable business environment that will attract foreign investment.

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

Photo by the author.

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The Peninsula blog is a project of the Korea Economic Institute. It is designed to provide a wide ranging forum for discussion of the foreign policy, economic, and social issues that impact the Korean peninsula. The views expressed on The Peninsula are those of the authors alone, and should not be taken to represent the views of either the editors or the Korea Economic Institute. For questions, comments, or to submit a post to The Peninsula, please contact us at ts@keia.org.