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Opinion pieces on business & economic issues

DONG Yong-Sueng

Inter-Korean Economic Exchanges on the Brink of Crisis

DONG Yong-Sueng

June 22, 2009

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Economic exchanges that the two Koreas have maintained for the past two decades are in crisis. The jointly operated Gaeseong Industrial Complex is in trouble because of North Korea 's demand for excessive wage hikes. The regime insists on raising the minimum wage of North Korean workers to US$300 from US$70 and annual wage increases to more than 10% from 5%. Since wage guidelines are prescribed in North Korean law, there is no alternative but to follow the regime's decision if it revises the law.

In addition, the regime reported that the land lease fee for the complex, which has already been paid, will be raised by 31 times. With such demands, no company will be able to remain at Gaesong. Under such a cost structure, there is no reason to operate there especially. Although there is room for negotiations, the possibility for compromise is slim, considering the current inter-Korean relations.

Meanwhile, the Obama administration is weighing strong economic sanctions against the North. Apart from resolution of UN Security Council, the US is planning to impose financial sanctions. When US Deputy Secretary of State James Steinberg led visits to South Korea and China recently, his delegation included high-ranking Treasury Department officials who were involved in blocking North Korean funds parked at Banco Delta Asia (BDA) in Macao. This suggests that the US is highly likely to approach financial sanctions as it did with the Macao bank in September 2005.

Strictly speaking, the so-called sanction involving BDA was not actually a sanction. The bank's name emerged during a US Treasury investigation into suspected counterfeit money from the North. Signs of illegal money in 50 North Korean accounts at BDA were detected and US banks were warned to be cautious in any financial transactions with BDA. Eventually, the banks voluntarily stopped all transactions with BDA. But the issue swelled with BDA freezing US$24 million in North Korean accounts and other banks becoming more and more reluctant to deal with BDA. Those banks were concerned that they could face financial sanctions by the Treasury Department if they engaged in transactions linked to the North.

Since trust is the most critical element for financial institutions, they may close doors with the mere a rumor that they may come under US sanctions. The amount of transactions that banks conduct with the North is small in scale. Therefore, they believe that freezing North Korean accounts or suspending activity would be far safer.

The US , this time, will seemingly adopt financial sanctions that will limit financial transactions with the North in any form. If that happens, a series of banks with North Korean accounts will likely close those accounts or refuse to open new accounts for the North. In the process, financial transaction by the North through banks will become virtually impossible. Moreover, Chinese banks will not be free from this issue because most of them use the US dollar for transactions.

However, since economic exchanges between the two Koreas are currently being done through third country bank, particularly Chinese banks, it is highly likely that they will directly be affected by US financial sanctions. The same can be said for direct transaction between the two Koreas. A recent report said that counterfeit bills from North Korea were found in Busan. Under the circumstances, South Korean banks may feel reluctant to transfer money to the North because if money for direct trade or processing trade toward the North is transferred to North Korean accounts in the third country (including China ), it will become a problem.

Since North Korea 's overseas accounts are opened by individual names, rather than institutional names, it is difficult to track the accounts. Nevertheless, suffering repercussions from sanctions is possible. Unlike 2005 when unintended sanctions were taken, the US is now more determined to seek financial sanctions - and with clearer goals. If that is the case, banks will fall in line more firmly and promptly. Then, there is likelihood that inter-Korean economic exchanges will be fully suspended because money transactions will become impossible except for the Gaeseong Industrial Complex.

As such, both the business project of Gaeseong Industrial Complex and inter-Korean trade are on the brink of suspension. In other words, inter-Korean economic exchanges that have been maintained for about 20 years are virtually facing their biggest crisis. However, we should view it as an inevitable process as economic exchanges go from an abnormal to a normal state. Overcoming this pain will allow a new order of inter-Korean economic exchanges or at least minimum of global standard to take root. But this pain will seemingly last long. That is because practices that have been formed for the past two decades will not improve within a short period of time.

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