Kaesong Industrial Complex – from CRS Report

The KIC enters into the U.S. policy debate because: (1) South Korea would like the United States to consider products made in the KIC as South Korean in origin for purposes of the Korea-U.S. Free Trade Agreement (KORUS FTA); (2) the KIC has become a growing source of foreign exchange for the communist government in Pyongyang; (3) the KIC is part of the strategy by South Korea to ease tensions with North Korea; (4) the KIC is a part of the DPRK’s economic reforms (similar to China’s special economic zones) that could lead to greater liberalization in the rest of its economy; (5) the KIC raises issues of security, human rights, and working conditions in North Korea; and (6) 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 fundamental issue with respect to the KIC is whether the United States should support any project that provides revenue to the Kim Jong-il regime in Pyongyang — considering the regime’s nuclear and human rights policies — and that includes questionable labor practices, even though the project seems to be enhancing cooperation between the DPRK and South Korea, lowering labor costs for South Korean businesses, and providing a possible beachhead for market reforms in the DPRK.

U.S. policy options include maintaining the status quo of supporting but not actively promoting the KIC, using the debate over the KORUS FTA to focus attention on labor and other conditions in the KIC, encouraging reforms in the KIC, providing close oversight to the Committee on Outward Processing Zones (if formed), tightening or loosening sanctions and export controls with respect to the DPRK, encouraging or prohibiting U.S. companies from doing business in the KIC, placing restrictions on South Korean companies that do business in North Korea, and encouraging other countries to (or not to) include the KIC in their respective FTAs with South Korea.

A question with respect to the KIC has been the conditions for North Korean workers there and whether they are being exploited. In January 2007, Jay Lefkowitz, President Bush’s special envoy for human rights in North Korea, wrote that one of the concerns he had with the Kaesong Industrial Complex is that authorities take a portion (as much as 45%) of the wages paid by the South Korean companies. He noted that verified details are elusive, and neither the DPRK nor South Korean government, nor any company, has been able to state definitively how much of his or her wage a Kaesong worker is allowed to keep.

During the negotiations on the KORUS FTA, South Korea requested that products exported from the complex be considered to have originated in South Korea in order to qualify for duty-free status under the proposed FTA. Under the South Korea-ASEAN FTA, for example, preferential tariffs are applied to 100 items manufactured in the Kaesong Industrial Complex. The Korea-Singapore and Korea-European Free Trade Association (EFTA) FTA agreements also include products from the KIC. Singapore accepts 88.6% of the traded products from the KIC as long as no products are directly exported from the DPRK. The Korean FTA with EFTA limits coverage to 2.9% of the total trade and only for those exports that have first been brought into the South Korean territory and which have 60% of the total materials cost as South Korean. In the current negotiations between South Korea and the European Union, Seoul has similarly requested products from Kaesong be covered by the proposed FTA. In 2006, the European Union (15 nations) imported $185.7 million worth of goods from North Korea. Switzerland imported $0.8 million and Singapore $6.6 million.

For the United States, however, from the beginning of the FTA negotiations, the U.S. position was that only products originating in South Korea would be included. At a U.S. House International Relations Committee hearing on July 20, 2006, Assistant U.S. Trade Representative Karan Bhatia indicated that the proposed FTA would not cover goods made in a free-trade zone in North Korea.

Another issue raised by the KORUS FTA is whether intermediate products made in the KIC can enter the United States under the provisions of the FTA if they are incorporated into products that are manufactured in South Korea and that qualify as originating in South Korea. The same concern exists with respect to products made in China or elsewhere if they have North Korean inputs. Currently, goods of North Korean origin may not be imported into the United States either directly or through third countries, without prior notification to and approval of the Office of Foreign Assets Control of the Department of the Treasury.

A further issue with respect to the KIC and the KORUS FTA is that if KIC products made with the low-cost North Korean labor are allowed to be treated as South Korean in origin under the proposed KORUS FTA, South Korean exporters would enjoy a large cost advantage over their counterparts in the United States.

Major policy considerations and options for Congress, given the U.S. interests, include the following:

· In considering whether or not to approve the KORUS FTA, Congress may express its support or non-support of the exclusion of the KIC from the FTA as negotiated. Congress may also specify the conditions under which the KIC can or cannot be brought under the provisions of the proposed FTA. Congressional disapproval of the proposed KORUS FTA likely would have a large negative impact on prospects for the future of the KIC with respect to the United States.

· In the debate over the KORUS FTA, Congress may focus attention on labor and other conditions in the KIC and encourage reforms.

· If the KORUS FTA is approved, Congress may provide close oversight of the Committee on Outward Processing Zones.

· Since the United States already imposes a range of economic and financial sanctions on the DPRK, the United States could either tighten or loosen them. This could affect non-South Korean businesses in determining whether to invest in the KIC or to purchase products made there. The United States also could tighten (or loosen) U.S. controls on the export of dual-use technology items to the KIC.

· The United States could impose restrictions on or provide inducements to U.S. business activity in KIC.

· The U.S. government could encourage other countries (or groups of countries, such as the European Union) to (or not to) include the KIC in their respective FTAs with South Korea.

· If the DPRK takes the necessary steps to halt its nuclear program as outlined in the six-party talks, support (or oppose) measures leading toward normal trading relations status for the DPRK and the lifting of economic sanctions.

· The U.S. government could place restrictions on South Korean firms that do business in North Korea.


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