12 February 2016

5 things to understand about the North-South Korea shutdown


What is the Gaeseong Industrial Complex?

The Gaeseong (sometimes spelled Kaesong) Industrial Complex is a joint project between North and South Korea, launched in 2004. It is an industrial park which lies on the North Korean side of the De-Militarised Zone (DMZ) separating the two countries, but over a hundred South Korean companies base factories and manufacturing plants there, using North Korean labour. The GIC was intended to foster cooperation between the two countries, and is a crucial source of income for poverty-stricken North Korea. According to Reuters, the project has contributed almost $2 billion in trade for North Korea.

Why has the South Korean government closed it?

This week, the South Korean government announced that it would shut down the GIC, in retaliation for North Korea launching a long-range rocket over the weekend, and following the announcement that it had successfully tested a hydrogen bomb in January. (This is in line with the US Senate’s approval of new sanctions on North Korea, which Congress is voting on today). In a statement on Wednesday, South Korea’s Unification Minister Hong Yong-pyo said that the GIC was providing revenue for North Korea to use on its nuclear programme:

“We cannot stop North Korea’s nuclear and missile programs with the existing methods of response… We need to act strongly together with the international community to ensure that North Korea pays a price, and we need to take special actions to leave the North with no option but to give up its nuclear program and change.”

What implications does this have for North Korea’s economy?

Closing the Gaeseong Industrial Complex is a matter of economic security for North Korea. According to Yonhap news agency, the 124 South Korean companies with operations in Gaeseong pay 54,000 North Korean workers a total of $100m a year. Last year, companies in the GIC exported over $500 million worth of goods – that’s roughly 13% of North Korea’s total exports. Although trade with North Korea’s biggest trading partner, China, has not been affected, the GIC is one of North Korea’s biggest gateways to international trade, and a rare opportunity for North Koreans to gain business experience. Closing it down and shutting off South Korean funds is a crushing blow to North Korea’s economy.

What has been the response?

North Korea has not taken the shutdown lightly. The government has called it “a declaration of war”, and severed the lines of communication between the countries. It has also designated the GIC a military zone, expelled 280 South Korean workers, and vowed to freeze the assets of the South Korean companies operating there.

Meanwhile, the shutdown has caused political turmoil in Seoul, with the opposition Minjoo Party criticising the Park administration’s decision, saying closing down the GIC will hurt South Korean enterprises more than the North Korean state. He also caused controversy by making hawkish remarks about North Korea being “annihiliated”.

What implications does this have for the future?

One step forward, two steps back. It looked like relations between the North and the South were thawing – in October, North Korea allowed 250 South Koreans to reunite with family members separated during the Korean War, for only the second time in five years. North Korea had also seemed to be cautiously experimenting with free enterprise, setting up special economic zones and sending selected officials to learn business skills in Singapore. The closure of the GIC is a blow to both those goals, chilling both the chances of reconciliation and economic development for the North. At a time when the world economy is becoming ever more open and connected, North Korea’s one legitimate doorway to the outside world has just slammed shut.

Rachel Cunliffe is Deputy Editor of CapX.