Why South Korea should reopen the Kaesong Industrial Complex

Author: Jean Lee, New York University School of Law

On 11 February the South Korean government abruptly shut down the Kaesong Industrial Complex (KIC), a joint inter-Korean industrial zone located just 10 kilometres north of the Demilitarised Zone (DMZ), as a punishment for North Korea’s recent nuclear test and rocket launch. The closure left more than 52,000 North Korean workers unemployed and more than 120 small- and medium-sized South Korean companies with nowhere to do business.

Korean People's Army Lt. Col. Nam Dong Ho is silhouetted against the truce village of Panmunjom at the Demilitarized Zone (DMZ), which separates the two Koreas, in Panmunjom, North Korea. (Photo: AAP).

On 8 March, the South Korean government announced unilateral sanctions against North Korea, including banning the entry of ships from third party countries to South Korea via the North and prohibiting dealings with 40 individuals and 30 entities related to the North’s weapons program.

The South Korean government hopes that these expanded sanctions will lead more countries to cut trade with North Korea and pressure it to abandon its nuclear weapons program. The announcement came a day after North Korea’s warning of pre-emptive nuclear strikes in response to the start of annual US–South Korea joint military exercises. In light of the skyrocketing tensions, the prospects for continued inter-Korean economic cooperation symbolised by the KIC appear grimmer than ever before.

Yet South Korea should reassess its decision to close the KIC. The KIC has taken on an irreplaceable role as a ‘lifeline’ connecting the divided nation that has survived numerous political storms. In the aftermath of the inter-Korean summit in 2000, the two Koreas’ respective leaders saw that economic cooperation and the resulting social exchanges could serve as a springboard for reconciliation. Successive South Korean administrations pursued a two-track approach of continuing economic engagement in spite of political tension.

But from 2008, a conservative turn in South Korean politics and a fraught leadership transition in North Korea threatened to set back economic cooperation. The Lee Myung-bak administration in South Korea declared that the expansion of the KIC would be halted until the North Korean nuclear issue has been resolved.

Still, the KIC continued to operate and ultimately survived even the escalating political and military conflicts of 2010 — including the sinking of the South Korean naval vessel Cheonan and the North’s shelling of Yeonpyeong, a South Korean island near the Northern Limit Line. The only real interruption to the KIC came in 2013, when North Korea unilaterally stopped South Koreans entering the complex in response to the South’s inclusion of a ‘KIC South Korean hostage rescue exercise’ as part of the annual US–South Korea joint military exercises. After months of closure the two governments agreed to reopen the KIC under a new joint management structure.

The economic rationale for reopening is obvious. Tens of thousands of North Korean job losses have had a devastating impact on the everyday lives of North Koreans and have led to instability as the former light industry workers have been relocated to work on ginseng plantations and in food processing factories with poorer labour conditions. Concerns are also growing among the small- and medium-sized South Korean businesses that used to operate in the KIC and depended on the cheap North Korean labour and land to retain a competitive edge for their products. The continuing employment of these North Korean workers, through their exposure to both the market economy and superior labour conditions, further holds a unique value in promoting a model for North Korea’s economic opening and reforms.

The KIC also plays an invaluable role as an avenue for continuing high-level dialogue and a platform for people-to-people exchanges across the border. Through the intimate interactions the KIC facilitates on various policy and operational issues, the KIC provides a confidence building measure capable of helping recover the lost trust between the two Koreas.

Around 800 South Korean managers and government officials reside in the KIC during the work week, coming into contact with over 50,000 North Korean citizens. This marks a level of people-to-people interaction that is unparalleled in inter-Korean relations. In addition, the KIC provides a unique opportunity for government-to-government dialogues and negotiations through which various institutional agreements have been struck.

Several key inter-Korean agreements were created thanks to the KIC, which provide for investment protection, prevention of double taxation, establishment of dispute resolution procedures and settlement based on open accounts. These treaty-like agreements guaranteed smooth and efficient flows of goods and personnel across the DMZ and provided overarching legal foundations for smooth operations of cross-border business between the two Koreas.

More broadly, the KIC has taken on irreplaceable symbolic significance in the minds of South Koreans as the only remaining ‘lifeline’ connecting the divided nation. The KIC is the only surviving initiative of economic cooperation between North and South Korea. It has shown remarkable resilience despite the intensified political and military tension between the two Koreas during the past two administrations. Losing the KIC permanently would be tantamount to destroying the last hope of reconciliation between the two Koreas. Tens of thousands of separated families and their children would find this unacceptably cruel.

The South Korean government should reassess the costs and benefits of the permanent shutdown of the KIC. While financially assisting the North Korean regime’s nuclear ambitions would be anathema, there is no clear evidence as to what extent North Korea has used revenue from the KIC for its weapons program. And it is unreasonable to expect that the KIC’s closure will lead to a change in North Korea’s behaviour.

On balance, the economic and political costs to South Korea of the KIC’s closure outweigh the benefit of its potential leverage in compelling North Korea to abandon its weapons program. The South Korean government should consider resuming the operations of the KIC, while maintaining a principled approach on the security front.

The security concerns surrounding the North’s weapons program have existed since the beginning of the KIC’s operations. The present tensions do not mark the first time that North Korea threatened to attack Seoul, either. To be sure, the specific circumstances and the intensity of the threat posed by North Korea’s nuclear capacity have evolved significantly. But the fundamental value of pursuing economic engagement and keeping communication channels open with North Korea remains unchanged.

Jean Lee is a graduate of the Woodrow Wilson School of Public and International Affairs at Princeton University currently working at the US–Asia Law Institute at New York University School of Law. This article is based on a chapter of the author’s thesis, ‘The Kaesong Industrial Complex and Its Implications for Inter-Korean Relations’.

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