from Asia Unbound

Kaesong Closure and the U.S.-South Korea Summit

May 02, 2013

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North Korea

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The muting of North Korean threats toward the United States has dropped it from the American headlines in recent weeks, but stepped up inter-Korean tensions over the closure of the Kaesong Industrial Complex (KIC) have consumed the time and attention of South Korean policymakers. Since April 3 Pyongyang has blocked the entry of South Korean people and goods for the complex and on April 9 withdrew its North Korean workers. In response, South Korea issued an ultimatum on April 25 demanding that Pyongyang agree by that day to negotiations on renewed access to the site. KIC hosts 123 South Korean companies, provides employment for 53,000 North Korean workers, and generates labor and tax payments to North Korea, which in 2012 amounted to $90 million in cash payments. (For an excellent review of Kaesong’s history and development, see Patrick Cronin’s CNAS report “Vital Venture.”)

When North Korea refused South Korea’s ultimatum, the South Korean government began to withdraw hundreds of remaining South Korean company representatives who were at the site but had dwindling access to supplies and food as a result of the North Korean border closure.  All but seven remaining South Korean company representatives left the complex on April 29, with the remaining South Koreans held back to negotiate outstanding North Korean financial claims against South Korean companies for labor and taxes owed.  As these negotiations drag on, they form a disturbing backdrop and focal point for President’s Park’s first summit at the White House on May 7 with President Barack Obama, who faces his own hostage challenge as American citizen Mr. Kenneth Bae, a tour operator held in North Korea since November of last year was sentenced to fifteen years of hard labor for crimes against the North Korean state.

KIC had been the last remaining symbol of inter-Korean rapprochement and had survived South Korean reprisals for North Korean provocations in 2010, including the sinking of a South Korean naval vessel and the North Korean artillery shelling of Yeonpyong Island.  The project survived primarily because the option of pulling the plug on Kaesong would result in a lose-lose scenario in which North Korea would lose South Korean company payments for North Korean labor while the South Korean government would have to reimburse its own companies for losses incurred as a result of the complex shutdown. Particularly on the North Korean side, a shutdown of the project seemed like a classic case of biting the hand that feeds it.

Analysts have struggled to identify a compelling rationale for North Korea to force a shutdown of the complex given the direct material costs to North Korea resulting from the shutdown.  One plausible rationale has been that with Kaesong remaining operational, North Korean threats of war with South Korea had lost their credibility, undermining North Korean efforts to mobilize their own population or escalate tensions with the outside world and thereby improve Pyongyang’s  future negotiating position.  But the most compelling explanation for Kaesong’s failure may be that the North Korean regime began to realize as part of its drive toward political consolidation that Kaesong provided a compelling and damning alternative narrative to its own list of “accomplishments,” including nuclear deterrence against external aggressors.