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  • Will the Way Open to the Activation of the Kaesong Industrial Complex and the Conclusion of an Inter-Korean CEPA?

Will the Way Open to the Activation of the Kaesong Industrial Complex and the Conclusion of an Inter-Korean CEPA?

|Korean Peninsula

The Kaesong Industrial Complex on the western side of the Korean Peninsula—as with Kumgangsan Tourist Region on the eastern side—has now become the sole gateway into the DPRK through which private ROK citizens can come and go relatively freely. While the negative factor of the DPRK’s declaration of its possession of nuclear weapons can never be ignored, if only the commercial spirit of the Kaesong merchants, around since the Goryeo Dynasty, can be restored—making full use of the nearby diverse business resources (except labor), the Gyeongui and Gyeongbu railway lines and expressways, and state-of-the-art airport and port facilities from the capital region which includes Seoul—then the investment environment will be rosy.

The development of the Kaesong Industrial Complex began in August 2000 in accordance with the development agreement between the privately-owned Hyundai and the DPRK-side. With the development, from 2003, of a complex of one million pyong (with a 50-year lease of land, and investment over five-years of 200 billion won) by the ROK-side, and, in 2004, the enacting of the Law of the DPRK on the Kaesong Industrial Zone and the construction of a model complex, the location of enterprises began. In that same year the first goods manufactured in the Kaesong Industrial Complex could be seen. As of August this year, 650,000 pyong of lots had been offered for sale, there were 18,000 DPRK employees, 39 enterprises had come in, and from December 2004 to July 2007 the cumulative output was US$180 million (42 million of that exports); Japanese SMEs too, which until now have shied away from investment in the ROK and have targeted China and Vietnam for their expansion, are considering the complex as an area which will be a candidate for investment in the near future that is by no means out-of-the-way, and appear poised to come in. The lowest wage of the DPRK employees, at US$52.50 per month (US$36.75 after tax), is not low, yet regardless of domestic and foreign demand, SMEs in most sectors appear to be seriously considering relocating to the Kaesong Industrial Complex or tying up with companies there in order to weather any worsening in the business environment, such as international price rises in resources and materials, wage increases, a strong won, and new site regulations.

Of course, the six-party talks function to substantively guarantee the disabling of the DPRK’s nuclear capability, and if regular inter-Korean summits take place, without waiting for an inter-Korean peace declaration or accord, or the normalization of DPRK–US or DPRK–Japan relations, the implementing early on in the Kaesong Industrial Complex of “one country, two systems,” as in Hong Kong within China, would create a space for learning where the high-quality workers of the DPRK could sense the rewards of liberal economics, and it is expected that this would become a bridge for inter-Korean cooperation. There are various problems, however, so that I cannot emphasize only such positive aspects.

Firstly, there are the four “passage” problems (commuting, transit, customs clearance and communications). The elimination is necessary at an early date of the limitations to sending requisite materials by land, the delays in inspection times for strategic materials, and the constraints on the expansion of the telecommunications networks and use of internet networks, to say nothing of the simplification of procedures for going to work by bus from the ROK and crossing to and forth. Secondly, there is the implementation at an early date of the existing four major agreements—on safeguarding of investments, the prevention of double taxation, the resolution of commercial disputes, and liquidation and settlements—which are a framework to promote the stability of projects with the DPRK. The current situation is that a concrete method of management has still not been settled, and the legal protection for companies setting up operations has not been created. Thirdly, there is the demonstration of strong will by the government authorities, such as on the expansion of the framework of compensation for the losses of companies setting up operations and on the reduction of charges, and fourthly, the raising of productivity via independent personnel and labor management, such as the recruiting, dismissal and reassignment of employees. There has been some improvement from before, although it is still insufficient. Fifthly, efforts should be concentrated on multifaceted trade negotiations to allow the country of origin to be the ROK, applying a regional formula for extra-regional processing to the Kaesong Industrial Complex. This is not merely the activation of the current industrial complex and its secondary development, but is probably a basic condition for bringing in overseas capital and technology to the economic special zones of Kumgangsan, Sinuiju, and Rajin-Sonbong and reducing the cost of Korean unification.

Moreover, combining into one the various cooperation projects with the DPRK, and to systematically maintain that, the conclusion of a CEPA (Closer Economic Partnership Arrangement) should be actively examined. Of course, this won’t be an agreement between two member states of the WTO, but a provisional arrangement for a divided region aiming at unification. First there should be the proposal of a framework for comprehensive economic cooperation with the DPRK, with at the beginning the reduction or abolition of customs duties in inter-Korean mercantile exchange, and then the facilitating of commerce and customs clearance, a phased liberalization of services and investment, and cooperation in trade and investment promotion, information technology, SMEs, textiles, science and technology, tourism, and energy. In that context, following the second Inter-Korean Summit at the beginning of October, concrete shared discussion toward the construction of a Korean economic community is awaited, with neighboring countries also included, at the same time as examining the commitments for action by the end of the year on the disabling and the making public of all nuclear programs, including the DPRK’s enrichment of uranium.

[Translated by ERINA]