South Korea Rethinks Business Ties to North

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May 25, 2005: North Korean workers at a factory owned by South Korean apparel maker Shinwon in the inter-Korean industrial park in Kaesong. Photo: Lee Jae-Won

SEOUL—Amid growing fears that North Korea may be planning a second nuclear test, South Korean officials and businesses are curbing commercial ties with their Stalinist northern neighbor.

“Investors already in Kaesong are deeply worried, although not yet hesitant over continuing their engagement there. It is a very tense state of affairs,” Song Byung-Yul, executive director of the Seoul-based Dongdaemun Special Zone Council, told RFA's Korean service.

“Many entrepreneurs have abandoned plans to invest there, or postponed their investment indefinitely, or at least until South-North relations take a turn for the better,” said Song, whose group works with the apparel industry.

South Korea has two major projects in North Korea where South Koreans can regularly cross the heavily fortified border. One is the Kaesong complex, where 15 South Korean companies employ about 7,000 inexpensive North Korean workers to produce consumer goods. The other is the Mount Kumgang tour project.

'Significant impact'

Many entrepreneurs have abandoned plans to invest there, or postponed their investment indefinitely,or at least until South-North relations take a turn for the better.

“About 400-500 investors from the Dongdaemun Zone in Seoul were planning on entering an area of about 16 acres, made available to them in apartment-type factories in the Kaesong Industrial Complex,” Song said.

“We had received applications from about 200 entrepreneurs, and about 200 also visited Kaesong last May. Expectations were really high,” Song said.

“But investing in apartment-type factories in Kaesong is an entirely different matter that could have a significant impact on our businesses, on our very livelihood.”

A South Korean Unification Ministry official was quoted by Reuters on Thursday as saying that Seoul would stop subsidizing tours to a mountain resort in North Korea that a U.S. official has labeled a cash cow for Pyongyang's leaders.

Seoul paid U.S. $2.9 million in 2004 and U.S. $4.9 million in 2005 to cover all or part of the tour costs for students, teachers, elderly war veterans, and others.

Tourists have paid $457 million in admissions and management fees to North Korea to travel to the Diamond Mountain resort. The South Korean Unification Ministry has said more than 1 million South Koreans have visited Mount Kumgang since 1998.

Outcry over cash payments

The resort, run by an affiliate of the South's Hyundai Group, has come under increased scrutiny since the U.N. Security Council imposed sanctions on North Korea to punish it for detonating a nuclear device on Oct. 9.

Local media reports estimate that South Korea spends several million dollars a year on Mount Kumgang tours, which can cost from several hundred to several thousand dollars.

In both projects, payments to North Korea have been exclusively cash-based, which has sparked an outcry in South Korea. Seoul has said it won’t stop the two projects but will modify them, possibly by paying fees to North Korea in kind.

The Hyundai Group has paid some U.S. $980 million to North Korea since 1998, all in cash, according to the Unification Ministry. That includes U.S. $500 million on business licensing fees, U.S. $20 million on rental and facility usage fees, U.S. $450 million for licenses to operate the Mount Kumgang tours, and U.S. $8.9 million for North Korean worker salaries. The Mount Kumgang project turned its first profit in July 2005.

Second test feared

Earlier this week U.S. intelligence experts said satellites had spotted an increase in activity at a suspected nuclear test site in North Korea. U.S. and South Korean officials said there was no sign another test was imminent.

But a South Korean lawmaker and parliamentary intelligence committee member, Chung Hyung-keun, said the North could be preparing three or four more tests.

“From a long-term perspective, North Korea will obviously sense the need for additional nuclear testing,” said Kim Tae-Woo, chief researcher at the Center for Security and Strategic Studies at the South Korean National Defense Research Institute.

A second test could be bigger in size, he said, adding that “smaller nuclear devices can be more treacherous, as they’re easier to transport, conceal and deliver, if terrorists choose that unfortunate path.”

“From a short-term perspective, if North Korea deems that the current regime is under threat, it may proceed with a second nuclear test at any moment,” Kim said in an interview. “As to the timing of the second test, one would have to read [North Korean leader] Kim Jong Il’s mind to find out the answer.”

New polls since the Oct. 9 nuclear test show most South Koreans want changes in their government’s “sunshine policy” toward the heavily fortified North. That policy was launched by former South Korean president Kim Dae-Jung and aimed at securing a gradual easing in tensions through commercial and aid contacts.

Annual trade between the two Koreas exceeded $1 billion for the first time in 2005.

More food aid urged

Aid groups have meanwhile cautioned that a halt in foreign food assistance could prove catastrophic.

Since the mid 1990s, North Korea has been dependent on foreign aid to feed up to one third of its population. Experts say up to 1 million North Koreans perished in the 1990s because of food shortages and hunger-related diseases.

“Although it is difficult to precisely gauge conditions in North Korea, there are serious indications that another food crisis is looming,” the New York-based Human Rights Watch (HRW) said in a recent statement.

According to the World Food Program (WFP), hundreds were killed and tens of thousands of North Koreans were left homeless in recent floods. Last year, North Korea received about 1 million tons of food aid, with about half coming from China and half from South Korea.

“North Korea has most likely run out of last year's harvest by now, and its harvest this year suffered from massive floods,” HRW said.

Meanwhile, WFP estimates this year suggest that North Korea currently lacks 800,000 metric tons of grain, or approximately one-sixth of the county's total annual food needs.

Original reporting by Wonhee Lee, Yonho Kim, and Jinhee L. Bonny for RFA's Korean service. Director: Jaehoon Ahn. Translated by Greg Scarlatoiu and produced in English by Sarah Jackson-Han and Luisetta Mudie.


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