TCS Daily

Winning One for the GIPper?

By Andy Jackson - June 23, 2006 12:00 AM

The recently concluded first round of talks on a free trade agreement between the United States and South Korea made progress on a number of potentially contentious issues including telecommunications, service industries, financial services and intellectual property rights. There are several outstanding issues, including rice, automobiles and general tariff reductions -- but those barriers can be overcome in subsequent rounds of negotiations.

However, a significant obstacle to an agreement will be the status of products made in the Gaeseong Industrial Park (GIP).

Gaeseong (Kaesong), the capital of Korea until it was moved to Seoul in 1392, sits just a few kilometers north of the Demilitarized Zone which divides North and South Korea. It is only an hour's drive from the South Korean capital and the port city of Incheon. Along with the Mount Gumgang tourist region on the east coast, GIP is the centerpiece of President Roh Moo-hyun's "Peace and Prosperity" policy of engagement with Pyongyang that attempts to achieve inter-Korean cooperation and eventual reunification through creating stronger economic ties.

Construction began on the park in 2003 and about a dozen companies have set up shop there to take advantage of labor costs about half that of China. By agreement between the North and South Korean governments, the wage of each North Korean worker is limited to about $57 per month. South Korean firms operating in GIP can work with a relatively well-educated workforce just a few kilometers north of Seoul that shares a common, if diverging, language. A final incentive for some Korean businessmen is their belief that North Koreans are harder-working and more conscientious than their Chinese or Southeast Asian counterparts, a view more attributable to Korean ethnic nationalism than any facts on the ground.

GIP opened in 2004 with 15 factories employing about 6,000 workers. Today, the park still employs only about 7,000. But Seoul and Pyongyang hope to help set up 2,000 businesses there by 2012. Those businesses will employ 700,000 workers, generating half a billion dollars in wages and hundreds of millions of dollars in tax revenues a year for North Korea. Pyongyang has to provide relatively little for those tax revenues since Seoul is providing hundreds of millions of dollars for construction and infrastructure. While the Roh administration will most likely subsidize businesses operating in GIP like it has Hyundai Asan's operation of the Mount Gumgang project, they hope that GIP will eventually pay for itself.

But the South Korean market is not big enough to cover Seoul's and Pyongyang's ambitions for GIP, so Seoul has been actively seeking export markets for products made there. Roh scored a major victory last December when Gaeseong-made products were included in a free-trade pact with the 10-member Association of Southeast Asian Nations (ASEAN). Seoul has also secured an agreement by the small European Free-Trade Association to lower tariffs on GIP products and hopes to eventually reach a similar deal with the much larger European Union. The Roh administration is determined to include GIP in any FTA with the United States.

The American position has been that, since Gaeseong is in North Korea, products made there cannot be included in the agreement. Further complicating matters are US sanctions against North Korea. If GIP cannot be included in the FTA, most products made there will not be available for sale in the US at any price.

Many Korean companies are waiting for the result of FTA negotiations before building or expanding in GIP. It will make little sense for companies in Korea's export-oriented economy to relocate facilities to Gaeseong if doing so freezes them out of the world's largest economy, so the inclusion of GIP in the FTA is crucial to the success of a central part of the Roh administration's rapprochement policy towards North Korea.

While Roh used anti-Americanism to help propel him into the Blue House presidential mansion in 2002 (in the wake of the death of two Korean school children who were run over by an American military vehicle), he has since largely discarded it and has shown a willingness to cooperate with the Bush administration on several issues. Roh broke ranks with his political base early in his administration when he agreed to dispatch thousands of Korean troops to Iraq. Dumping his former call for American forces to withdraw from Korea, Roh has agreed to American desires to redeploy its forces further from the DMZ, a move that angered many in the Korean left.

But Roh has stuck to his guns on what he sees as core issues, central among them is a policy of rapprochement with North Korea. His cooperation with the US on Iraq and the American troop redeployment is seen by many observers as attempts to gain American cooperation on his North Korean policy.

The political and economic calculus is inescapable. Roh's engagement policy with North Korea is based upon increased economic integration between the Koreas. GIP is central to the success of that policy. Without access to the American market, GIP will most likely fail. So the US must accept GIP-produced products or the most important policy of Roh's presidency will be dealt a crippling blow.

That reality at least in part explains Roh's enthusiasm for a FTA with the US and sets the limit of the compromises he is willing to make in order to secure an agreement. The Koreans will show flexibility on most issues, but will not compromise on GIP. At a minimum, the Roh administration will insist that Korea be allowed to export GIP-made products into the USA with normal tariffs.

The Bush administration will not agree to include GIP in a FTA. Aside from setting a precedent for inclusion of products made a third country, including GIP flies in the face of the administration policy of pressuring North Korea with sanctions for its nuclear proliferation and counterfeiting of American currency. Even if the Bush administration did compromise on including GIP in a FTA, such an agreement would almost certainly fail to pass Congress. The vote is already expected to be close. Including GIP would raise enough objections from labor and conservative groups that it would make the proposed FTA dead on arrival.

An American-Korean free trade agreement will most likely have to wait until President Roh leaves office in early 2008.

Andy Jackson is a writer living and working in Korea.


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