Saturday, June 09, 2007

A Capitalist Toehold in North Korea

Despite U.S. tariffs, more South Korean businesses are setting up shop in the North

From afar, the North Korean special economic zone of Kaesong looks like a Cold War relic. Getting there from Seoul takes you down a highway with tank traps set into the pavement, past checkpoints manned by machine-gun-toting guards, and through the demilitarized zone in a corridor flanked by barbed-wire-topped fences. Finally, you reach the barren boulevards and hulking buildings of the zone itself.

But take a closer look and you'll find the place is humming. The 23 South Korean companies operating there employ some 15,000 North Korean workers—double the number of just a year ago. In March, Kaesong's factories churned out $13 million worth of goods, up from $200,000 in January, 2005. An additional 47 South Korean companies are preparing to set up shop there, while Seoul in June is expected to give as many as 300 more the all-clear to move in. Within three years, Kaesong could employ as many as 100,000 workers. "Our Kaesong plant is more efficient and competitive than any factory in China, Vietnam, or anywhere in the world," says Park Sung Chul, chief executive of apparel maker Shinwon, which employs 900 workers in the zone who churn out 60,000 shirts, skirts, and other garments per month.

There's one place, though, where the competitiveness of Kaesong's factories doesn't count for much: Washington. Hardliners take a dim view of the project, arguing that the hard currency it generates for Pyongyang only perpetuates the rogue regime of dictator Kim Jong Il. U.S.-led pressure on Pyongyang to give up its nuclear arms program forced Seoul to slow its investment in Kaesong. That resulted in a two-year delay in the project, conceived during a thaw in North-South relations in 1998 and finally opened in 2004. Under the Trading with the Enemy Act, North Korean exports to the U.S.—including those from Kaesong—are severly restricted. They face tariffs of up to 90%, while most goods from South Korea will be eligible for duty-free entry once a free-trade agreement reached in April is ratified. "If we could start shipments [to the U.S.], the operation here would increase tenfold," says Park, whose company makes more than 40% of its $372 million in annual sales to U.S. customers such as Wal-Mart (WMT ), Gap (GPS ), and Target (TGT ).

Washington's opposition could be a big problem since Seoul has a lot riding on Kaesong's success. The South hopes the zone will give it an economic boost as the country finds itself squeezed between high-tech Japan and low-cost China. The park's North Korean workers—mostly women who are prescreened by bureaucrats in Pyongyang and bused in daily from neighboring towns—earn $57.50 a month regardless of their job or experience. That's roughly a third of what a Chinese factory worker makes, and it hasn't increased since Kaesong opened for business.

There's more than simple economics to the South's interest in Kaesong. Seoul sees the industrial park as a first step toward integration of the Korean peninsula. Powered by Kaesong, two-way trade between North and South Korea jumped 43%, to $350 million, in the first four months of this year. The South has already poured some $230 million into the project and expects to invest several times that over the next decade. If things pan out, within 10 years Kaesong will develop into an economic showcase with more than 500,000 North Koreans working in a bustling boom town—helping to spur reforms in the North. "There will be lots of hurdles," says Lee Young Hoon, an economist at the Bank of Korea, the South's central bank. "But given the economic benefits, the Kaesong project has great potential for coaxing Pyongyang out of its shell."


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