The U.S. and So. Korea are working on a Free Trade Agreement (FTA). The first round of negotiations was held in Washington in early June; the next begins July 10 in Seoul. The potential economic and political benefits are attractive for both countries (Are there large potential benefits from a U.S.-S. Korea FTA? , June 18).
Jeffrey J. Schott, Scott C. Bradford, and Thomas Moll provide a useful overview of the issues in their recent report: Negotiating the Korea–United States Free Trade Agreement (Institute of International Economics, June 2006).
They point out that one of the key issues is a So.Korea joint venture with No. Korea in an industrial park at Kaesong in No. Korea. This is an important project for the So. Koreans:
The Kaesong industrial complex is the centerpiece of North-South economic cooperation under the peace and prosperity policy of South Korean President Roh Moo-hyun. At present roughly a dozen South Korean firms operate in the industrial park, employing approximately 6,000 North Koreans producing labor-intensive manufactures. (To date North and South Korea have not opened the zone to third-country firms.) Seoul envisions firms in the industrial park ultimately employing more than 700,000 North Korean workers producing heavy chemical and engineering products...
The Asian Logistics blog five part series on Kaesong provides a lot of background, particularly with respect to logistical issues: Kaesong Industrial Complex Part I: Introduction (April 23, 2006); Kaesong Industrial Complex Part II: The Predecessors (April 23); Kaesong Industrial Complex Part III: Summary of Economic, Political, Security and People Flows at Inception (April 23); Kaesong Industrial Complex Part IV: Rationale Behind Kaesong Selection (April 24); Kaesong Industrial Complex Part V: Economic Flow Architectures (April 26).
The So. Koreans want goods from Kaesong treated like goods from So. Korea itself in the FTA:
South Korea has requested duty-free treatment for products produced in Kaesong in other FTA negotiations. Products produced in the zone are granted duty-free treatment in South Korea’s agreement with Singapore and receive duty-free treatment subject to a rule that 60 percent of the content is South Korean in South Korea’s agreement with the European Free Trade Association.
Now China has also agreed to recognize a So. Korean origin for goods made in Kaesong: China to Recognize Kaesong Goods as Made in S.Korea ( Chosun Ilbo, Korea (July 3), via "bilaterals. com", July 4). Korea has sought the agreement to pressure U.S. negotiators.
In the case of the Korea-US FTA, however, the situation is a bit more complicated. The United States maintains an extensive set of economic sanctions against North Korea dating back to 1950. North Korea is among the few countries to which the United States does not grant normal trade relations status, and North Korean exports are subject to the so-called column 2 tariff rates established by the infamous Smoot-Hawley Tariff Act of 1930. These tariffs tend to be highest on the sorts of labor-intensive products currently manufactured at Kaesong, so duty-free treatment could be critical to successfully exporting to the United States from the zone.
Realistically, the volume of exports emanating from Kaesong will likely remain trivial for some time. Nonetheless, the South Korean side may well insist on its inclusion. From the standpoint of rapidly and successfully concluding an FTA between the United States and South Korea, however, a request for duty-free treatment for Kaesong-produced goods is a high-cost, low-payoff addition to the negotiating agenda—and one that could put the entire initiative in jeopardy.
Goods from Kaesong will raise labor standards issues for the U.S.:
If Kaesong is included in the negotiation, it also will create a thorny issue with respect to labor standards, and the AFL-CIO has already indicated that it will press this point. The issues are two-fold.
Substantively, North Korea does not meet internationally recognized core labor standards; rights to associate, organize, and bargain collectively are absent entirely in autocratic North Korea, nor does the regime allow international monitoring of labor conditions. At Kaesong, workers are not hired directly—instead they are hired through a North Korean government agency, which reputedly retains a large share of the $57.50 per month paid to the government labor broker on behalf of the worker by the South Korean employer to cover social security payments as well as transportation and other in-kind benefits.26 Moreover, according to South Korean government sources, while South Korean firms pay in hard currency, North Korea pays the workers in North Korean won converted at the wildly overvalued official exchange rate. Evaluated at the more realistic black-market rate, and even with overtime pay, North Korean workers net less than $3 per month. That said, while conditions in Kaesong may be exploitative, they may well be considerably better than those existing elsewhere in North Korea.
Procedurally, while the FTA will presumably include a labor standards chapter, South Korea has no way to enforce such commitments in Kaesong, where North Korea is sovereign. One possible solution, already denounced by the South Korean Ministry of Unification, would be to involve a third party such as the International Labor Organization (ILO) to monitor conditions in the zone and certify compliance with agreed standards. Such an approach was applied in the Cambodian textiles case and has been floated by Jay Lefkowitz, President Bush’s special assistant for North Korean human rights. But this solution would require the cooperation of the North Korean government, which is not a member of the ILO, has a track record of noncooperation in other spheres of international engagement and to date has restricted access to the zone of third-party observers. Indeed, if South Korea were to request inclusion of the Kaesong zone in the negotiations, the United States conceivably could demand national treatment
for US investments within the zone, a request to which the North Korean government would never accede even if the South Korean government would.
And the labor standards concerns are just a start:
Moreover, these labor concerns add to the considerable list of US problems with North Korea, including North Korean state involvement in counterfeiting US currency, nuclear proliferation, drug trafficking, and other illegal, illicit, or objectionable behavior that already pose serious political impediments to an extraterritorial extension of the FTA to products from Kaesong. If the labor issues are not adequately addressed in the negotiations, the Kaesong issue could well damage prospects for concluding the FTA and doom the ratification process in the US Congress. Labor problems in Central America, which almost scuttled CAFTA-DR, pale compared with the abuses of the North Korean regime. If these practices are ignored in an FTA, congressional scrutiny will create a firestorm of opposition to the trade pact with Korea—and justifiably so.
Now, add today's No. Korean missile tests: N. Korea Test-Fires Long-Range Missile .