The Kaesong Trap


The Kaesong Trap

Aug 19th, 2013 3 min read
Bruce Klingner

Senior Research Fellow, Northeast Asia

Bruce Klingner specializes in Korean and Japanese affairs as the senior research fellow for Northeast Asia.

South and North Korean negotiators reached a preliminary agreement last week to reopen the jointly run industrial zone in Kaesong. But their success against considerable odds raises several questions.

Most fundamentally, why does Seoul want to return to Kaesong in the first place? The benefits lop-sidedly accrue to Pyongyang, providing a steady source of hard currency to the beleaguered regime. On the southern side, there is no economic incentive, corporate advocacy or political interest in expanding the complex. Even before the most recent round of North Korean threats, Kaesong was on life-support.

Economically, Kaesong is simply not viable. When the complex opened in 2004, advocates predicted meteoric expansion, fueled by an ever-increasing number of South Korean and foreign firms. But no large South Korean company ever joined it. Foreign investors avoided an enterprise hounded by frequent production stoppages, security risks, and Pyongyang arbitrarily nullifying existing contracts to demand higher wages and retroactive taxes.

Politically, the Kaesong experiment has also failed. Proponents of engagement with Pyongyang argued that North Korean worker exposure to southern counterparts would induce broader reform in the hermit kingdom. These predictions proved hopelessly naive. As Pyongyang announced last year, "To expect policy change and reform and opening from [North Korea] is nothing but a foolish and silly dream."

Engagement advocates assert that maintaining Kaesong, along with diplomatic outreach and providing humanitarian aid, provides some level of protection against North Korean provocations. But the Kaesong venture did not constrain North Korea from twice attacking South Korea in 2010. Nor did Kaesong or the South's offer to re-engage and delink humanitarian assistance from progress on denuclearization prevent Pyongyang from threatening Seoul with nuclear annihilation earlier this year.

An even more troubling aspect of last week's agreement is the way it may needlessly constrict Seoul's ability to shut down the venture in response to future North Korean provocations or attacks. It reportedly contains a provision that "South and North guarantee the industrial zone's normal operation without influence of any kind from the political situation." Has Seoul just guaranteed Pyongyang that it will never sever its involvement in Kaesong even if North Korea attacks again?

South Korea should always retain the option to pull the plug on Kaesong as part of more comprehensive sanctions. That flexibility is fundamental to President Park Geun-hye's strategy known as trustpolitik, or "trust-building." This is a continuation of her predecessor Lee Myung-bak's conditional approach, though applied more deftly, that rewards the North for good behavior and punishes it when it stages provocations.

After the sinking of the South Korean naval vessel Cheonan, for example, President Lee severed all inter-Korean economic dealings, though he exempted Kaesong. Mr. Lee's actions reduced Pyongyang's access to foreign currency.

Mr. Lee, elected in 2007, dropped Seoul's ideologically driven engagement policy by requiring that any future inter-Korean ventures be economically viable. He still offered significant developmental assistance aimed quintupling North Korea's per capita GDP, but only if Pyongyang began to live up to its previous denuclearization pledges.

For this, Mr. Lee was condemned as an unreasonable hardliner by uber-engagers who held the South Korean president responsible for North Korean belligerence and intransigence. South Korean progressives even blamed Pyongyang's sinking of the Cheonan and shelling of a civilian island, which killed 50 citizens in 2010, on Mr. Lee's requirement for conditionality and reciprocity when engaging the North.

Unlike her predecessor, President Park's approval rating remains high, buoyed both by her political acumen and resolve in standing up to Pyongyang's threats. And if there is a silver lining in the Kaesong agreement, it is that Ms. Park has shown the correct way to negotiate with the North. By holding fast to its conditions, her administration did achieve some necessary guarantees against Pyongyang again leveraging the Kaesong enterprise to stymie the policies of the South and its allies.

The agreement also shows that international pressure can have an effect on North Korea when it threatens the regime's economic lifelines to the outside world. Incrementally tougher sanctions have impacted regime finances, though their impact is undermined by half-hearted Chinese implementation.

Perceptions that the new Chinese leadership has adopted a tougher policy toward its North Korean ally have not yet been borne out by firm evidence. To date all Chinese enforcement measures, such as the Bank of China severing ties with Pyongyang, were later rescinded.

The new agreement is testament to Ms. Park's principled stand against having Seoul once again make unilateral concessions in order to resume its extortion payments to Pyongyang. She was willing to have her negotiators walk away from the table if they didn't attain necessary provisions. For this, she should be strongly commended.

Nevertheless, while this inter-Korean agreement is better than those achieved in the past, Seoul should proceed cautiously, if at all.

-Mr. Klingner is a senior research fellow at the Heritage Foundation and previously served as the CIA's deputy division chief for Korea analysis.

First appeared in The Wall Street Journal Asia.