Economic relations between North Korea and South Korea broke major new ground in 2005. Inter-Korean trade increased by more than 50 percent over the previous year and exceeded $1 billion for the first time. After many years of struggle, Hyundai’s Mt. Kumgang tourism project turned in an operating profit. The Kaesong industrial complex, located just north of the Demilitarized Zone (DMZ), began churning out goods in mass quantities, showing what North and South Korea could do if they work together. Also, the inter-Korean railroad linkage project appeared only a test run away from being completed. Last but not least, the 19 September joint statement of principles raised hope that the six-party process would resolve the long-running nuclear crisis on the Korean peninsula and enhance peace and security in Northeast Asia. These positive developments fueled speculation that, after several false starts over the past decade, inter-Korean economic relations had finally entered a new phase of sustained growth.
Such optimism fizzled by the summer of 2006. Almost immediately after the release of the joint statement of principles, the United States and North Korea issued polar- opposite interpretations of the document, particularly with regard to the sequencing of steps to be taken in the course of resolving the nuclear crisis (Pritchard 2005; Sigal 2005). U.S. financial regulatory actions against North Korea, implemented just before the 19 September joint statement, further complicated the situation. Whereas Washington insisted that these measures had everything to do with law enforcement and nothing to do with the six-party talks, Pyongyang saw them as yet additional evidence of U.S. hostile policy toward North Korea. Newspaper articles in the United States on the Bush administration’s plan to “squeeze” North Korea subsequently confirmed Pyongyang’s worst fears.1 “Give sanctions a chance” seemed to be the motto for the new policy.
With the hardening of U.S. policy toward North Korea, inter-Korean economic cooperation came under greater scrutiny. In the spring of 2006, some U.S. policymakers raised questions about the human rights of the North Korean workers at the Kaesong industrial complex—a curious choice in light of the fact that Kaesong has far better working conditions than anywhere else in North Korea. When this line of criticism proved rather ineffective, the focus of inquiry shifted to Pyongyang’s revenue stream from inter-Korean cooperation projects. Whereas South Korea argued that inter- Korean economic cooperation would facilitate reform in North Korea, the United States feared that it would only sustain the Kim Jong-il regime while producing minimal changes in its behavior. The friction between South Korea and the United States cast a dark shadow over the prospects of inter-Korean economic relations.2
To make matters worse, North Korea increasingly called for the resolution of “the fundamental issues” that were blocking progress in inter-Korean relations—namely, the lifting of South Korea’s ban on visits to the Kim Il-sung mausoleum, redrawing of the northern limit line (NLL) in the Yellow Sea, abolition of the National Security Law, and discontinuation of South Korea’s joint military exercises with the United States. In discussing inter-Korean economic projects with major security implications, such as the linking of the railroads, North Korea tried to bring up these age-old, fundamental issues. In fact, Pyongyang abruptly cancelled an inter-Korean train run scheduled for May 2006 when—contrary to its expectations, which had been shaped in part by Roh Moo-hyun’s gushing remarks on inter-Korean relations in Mongolia earlier in the month—it could not make any progress on the NLL issue. North Korea’s missile launch on America’s Independence Day further poisoned the atmosphere for inter- Korean economic cooperation. In response to the missile launch, the South went so far as to stop food and fertilizer aid to the North, except for a reduced emergency aid shipment after a flood in the North. Finally, North Korea’s nuclear test on 9 October 2006 shook up the very foundation of inter-Korean economic relations and prompted serious questions about the possible transfer of proceeds from cooperation projects to North Korea’s weapons programs. In particular, the adoption of the United Nations Security Council Resolution 1718 on 14 October led to increasing demand for transparency.
In sum, although inter-Korea economic cooperation seems more commercially viable than ever before, its political foundation has considerably weakened since September 2005. With the six-party process going nowhere and inter-Korean relations at one of the lowest points in recent memory, there is increasing concern about the future of inter-Korean economic cooperation.
This paper looks at the development of inter-Korean economic relations since the late 1980s and draws policy implications for the future. This paper is organized as follows. Section II provides an overview of inter-Korean trade, starting with its definition as “intra-nation transaction.” Section III explains the significance of inter-Korean trade from both the South’s and North’s perspectives. Section IV discusses three policy dilemmas associated with inter-Korean trade: (1) big bang vs. gradualism, (2) economic- security linkage, and (3) economic engagement and human rights. Section V concludes.