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Tuesday, June 22, 2010

The Kaesong North-South Korean Industrial Complex

Dick K. Nanto
Specialist in Industry and Trade

Mark E. Manyin
Specialist in Asian Affairs

This purpose of this report is to provide an overview of the role, purposes, and results of the Kaesong Industrial Complex (KIC) and examine U.S. interests, policy issues, options, and legislation. The KIC is a six-year old industrial park located in the Democratic People's Republic of Korea (DPRK or North Korea) just across the demilitarized zone from South Korea. As of May 2010, over 110 medium-sized South Korean companies are employing over 40,000 North Korean workers to manufacture products in Kaesong. The facility has the land and infrastructure to house two to three times as many firms and workers. If the master plan of Hyundai Asan, the codeveloper of the project, is followed the KIC eventually will be over 6,000 acres (nearly half the size of Manhattan Island) and include high-technology zones, shopping districts, residential areas, and facilities for tourism and recreation. 

The complex has continued to operate despite a rise in tensions between North and South Korea since early 2008. Indeed, the complex expanded somewhat during a roughly nine-month period from November 2008 through August 2009, a period when North Korea took a number of actions South Korea and the United States deemed provocative. As of early June 2010, the complex had been excluded from the latest deterioration in North-South relations, which was triggered by the March 2010 sinking of a South Korean naval vessel, the Cheonan. After a multinational investigation determined that the ship had been sunk by a North Korean submarine, South Korea announced it would cut off all inter-Korean economic relations except the Kaesong complex. South Korea also said it would reduce by two-thirds the number of South Korean workers— primarily government and business managers—at the complex because of worries about them being taken hostage by North Korea. North Korea responded by expelling several South Korean managers. 

The KIC represents a dilemma for U.S. and South Korean policymakers. On the one hand, the project provides an ongoing revenue stream to the Kim Jong-il regime in Pyongyang, by virtue of the share the government takes from the salaries paid to North Korean workers. South Korean and U.S. officials estimate this revenue stream to be around $3 million to $4 million per month. On the other hand, the KIC is the last remaining form of cooperation between South Korea and the DPRK, providing a possible beachhead for market reforms in the DPRK that could eventually spill over to areas outside the park and expose tens of thousands of North Koreans to outside influences, market-oriented businesses, and incentives. 

The United States has limited direct involvement in the KIC, which the United States has officially supported since its conception. At present, no U.S. companies have invested in the Kaesong complex, though a number of South Korean officials have expressed a desire to attract U.S. investment. U.S. government approval is needed for South Korean firms to ship to the KIC certain U.S.-made equipment currently under U.S. export controls. The Korea-U.S. Free Trade Agreement (KORUS FTA), which has yet to be submitted to Congress for approval, provides for a Committee on Outward Processing Zones (OPZ) to be formed and to consider whether zones such as the KIC will receive preferential treatment under the FTA.

Date of Report: June 1, 2010
Number of Pages: 23
Order Number: RL34093
Price: $29.95

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