Since taking an international trade class at Wellesley this year, I found myself paying more attention to trade-related news, especially businesses between the two Koreas. It wasn’t all that unapproachable and boring as I thought it would be before taking the class; now that I understand some of the terms and basic concepts behind international trade, reading about current events became a lot more enjoyable. One of the news items that caught my eye recently was the Kaesong Industrial Complex and its status in the Korea-China FTA.
Last month, South Korea and China started their process of free trade agreement (FTA) negotiations. China, which is currently South Korea’s largest trading partner, obviously has a great impact on Korea’s economy. In this sense, the decision to give preferential tariff on goods produced in designated outward processing zones (OPZ)* such as Kaesong Industrial Complex as part of the Korea-China FTA carries significance. This acknowledgement means that items partially or wholly produced in Kaesong by South Korean businesses would be categorized as South Korean in origin. This is meant to offer bigger business opportunities for corporations, which will contribute to peace between the two Koreas.
The Kaesong Industrial Complex was formed in 2002 as a collaborative economic project between South and North Korea, and is often denounced as a “capitalist enclave” in North Korea. It is located just above the Korean Demilitarized Zone, and as of 2010 employed around 44,000 North Korean workers. In 2010 the complex produced US$323 million worth of goods, a number which may keep growing with more employment of North Korean workers.
The complex has been of interest in recent years, when North-South Korea relations have become rockier than before, with events such as the Cheonan incident and rocket missile launch. Despite rising tensions, however, neither the North nor the South Korean government has shut down the complex. The costs of doing so would have been too high for both sides, albeit for different reasons.
For the North, the complex provides jobs and brings in hard currency of $50m per month. For the South, not only would it have to provide millions of dollars in insurance to the 120 South Korean companies should the complex be shut down, it would also mean a symbolically significant gesture of inter-Korean cooperation. Although many businesses wouldn’t count Kaesong Industrial Complex as adding much to their profitability (many businesses actually report a decline in buyers from North Korean factories due to fear of political instability), some are choosing to stick around because of patriotic reasons.
Current FTAs between South Korea and the EU and the US do not recognize Kaesong Industrial Complex as an OPZ, which means that items that go through the complex do not receive preferential tariff treatments. Although the extent of financial impact that the new inclusion of goods produced in OPZs will have in the Korea-China FTA is unclear at the moment, it certainly has political implications for all parties involved. Having active OPZs may not have a direct correlation to possibilities of unification, but one thing is clear, which is that OPZs encourage more dialogue and cooperation between the two Koreas. Once goods processed in zones such as the Kaesong Industrial Complex become included in the Korea-EU and Korea-US FTAs, they might also bring the two Koreas closer in hopes of better business opportunities and prospects.
*Outward Processing is a customs procedure where goods which are in one custom territory are temporarily exported for manufacturing, processing or repair abroad and then re-imported with an exemption from import duties and taxes.