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The Peninsula

Should Mount Kumgang Re-open Before the Kaesong Industrial Complex?

Published January 16, 2019

By Troy Stangarone

It looks increasingly likely that a second U.S.-North Korea summit will take place before the end of February. Ahead of this engagement, there is growing pressure for the United States to lift some sanctions on North Korea and exemptions for inter-Korean projects.

The U.S. government maintains that sanctions will only be lifted when Pyongyang completes or makes substantial progress on denuclearization. However, any successful negotiation with North Korea will likely need to involve sanctions relief at some point.

Experts estimate that dismantling North Korea’s nuclear program may take years. As a result, it may be unreasonable to expect North Korea to wait until the end of the process to see the benefits of good behavior. While it is unclear whether the U.S. government would be prepared to provide significant sanctions relief after a second summit, relief will likely have to come in stages and involve either or both Mount Kumgang and the Kaesong Industrial Complex.

View from the Peninsula

North Korean Chairman Kim Jong-un elevated this long-standing demand in his New Year Address, noting that without sanctions relief North Korea “may be compelled to find a new way for defending the sovereignty of the country and the supreme interests of the state and for achieving peace and stability of the Korean peninsula.” In those same remarks, Kim also suggested that he would be open to the resumption of commercial activity at the Kaesong Industrial Complex and to restart tourism at Mount Kumgang.

Following these remarks, North Korean state media began applying pressure on South Korea and the United States to move forward with inter-Korean projects. It has also accused the United States of meddling in inter-Korean relations, mocked the groundbreaking ceremony to reconnect inter-Korean railways, and called for across-the-board inter-Korean economic cooperation.

At the same time, South Korean President Moon Jae-in has suggested that since North Korea has not laid out any preconditions for the projects, once the issue of international sanctions has been addressed cooperation at the Kaesong Industrial Complex and Mount Kumgang can move forward. Though, it is unclear if Moon’s remarks also meant that South Korea would no longer push North Korea to express regret for the shooting of a South Korean citizen at Mount Kumgang in 2008, the original reason for the resort’s closure, and to take additional steps to ensure the safety of South Korean tourists.

Parameters

If sanctions relief begins, even in a staged approach, policymakers will need to consider a range of factors. The first is whether relief would be permanent, renewable, or an exemption. If relief is permanent, it would entail votes at the UN or for the U.S. Congress to permanently remove a sanction’s authority. If the sanctions relief is renewable, authorities will need to establish a time-based exemption that requires regular review based on Pyongyang’s progress on denuclearization. If the relief is only an exemption, the 1718 Committee in the United Nations would most likely address it in a limited fashion rather than completely lift sanctions on a whole category like textile exports.

Other important considerations include whether the relief is proportionate to steps taken by North Korea; how North Korea might benefit from the relief; whether the specific sanction is tied to North Korea’s weapons activities; and what authority or influence the U.S. administration has to have a specific sanction permanently removed (or lifted on a renewable basis, or receive a limited exemption).

These are just a few of the issues that will have to be considered.

The Two Sites

Kaesong and Mount Kumgang have received specific attention since providing sanctions relief for these two projects would include the resumption of prior inter-Korean activity. Additionally, there is perhaps greater domestic pressure for President Moon to see Kaesong reopened because businesses that used to operate there continue to push for the complex to reopen. They have already traveled to Kaesong to take part in the opening ceremony for the North-South liaison office and have been pushing for visits to North Korea to inspect their former facilities.

North Korea has incentives for resuming the two projects as well. The tourist facilities at Mount Kumgang ran from 1998 until they were closed in 2008. During that period almost 2 million people, the vast majority being South Koreans, visited the resort, earning North Korea almost $500 million.

The Kaesong Industrial Complex at the time of its closure was employing some 54,700 North Koreans by 124 South Korean firms. Through wages, taxes, and fees, North Korea earned upwards of $120 million in the last full year of operation.

Constraints

Resuming operations at either Mount Kumgang or the Kaesong Industrial Complex could be complicated, especially if they were reopened at the beginning rather than the end of a staged sanctions relief process as it would mean addressing the constraints of a series of sanctions that have been placed on North Korea.

For example, both Mount Kumgang and Kaesong would require adjustment of financial sanctions to ensure payment to North Korea. Private banks are unlikely to accept exempted transactions. Current sanctions also prohibit the transfer of bulk cash. One option might be to set up an escrow account for North Korea, but it is unclear if North Korea would accept the limitations that such an option would entail.

Another financial issue would be South Korean government subsidies. Firms in Kaesong were eligible for political risk insurance and state subsidies and the South Korean government previously subsidized some tourism at Mount Kumgang. These prior practices would likely face restrictions around providing financial support for trade with North Korea and either need an exemption or to not be part of the operation of either facility until other sanctions are lifted.

Other factors could make opening either Kaesong or Mount Kumgang difficult. As previously mentioned, North Korean textile exports are banned. A good portion of the firms previously operating in Kaesong were textile manufacturers. Would textiles in Kaesong be given a special exemption to export? That could be politically complicated if Chinese textile joint-ventures in North Korea were not given an exemption to export, especially since the only real markets for Kaesong textiles would likely be South Korea and China. Would South Korea accept a partial reopening of Kaesong if there were political difficulties in getting all of the UN Security Council members to back an exemption for any sanctioned item previously produced in Kaesong?

Power could be an issue as well. While Kaesong is powered from a plant based in South Korea, Mount Kumgang is not. It would also require an exemption on restrictions related to refined fuel being sent to North Korea to run the resort’s generators. The fuel shipments would also run up against U.S. sanctions.

Path of Least Resistance

Resuming either project would entail a careful consideration of specific exemptions and whether those exemptions would encourage increased cooperation from North Korea or would lead to a focus on further exemptions rather than on North Korean steps towards denuclearization. It also seems unlikely that specific exemptions could be crafted just for Kaesong and Mount Kumgang that would not affect the overall sanctions regime.

Ultimately, if one of the inter-Korean projects were to get the green light through a staged sanctions relief process, Mount Kumgang may have an advantage over Kaesong. Its operations likely entail fewer potential conflicts than Kaesong, and potentially fewer competing interest since China has already taken steps to loosen its restrictions on tourism. Additionally, if progress with North Korea were to stall, suspending tourism would be less disruptive than suspending the operations at Kaesong.

Only Trump knows if North Korea will receive sanctions relief, but if one of the inter-Korean projects were to resume in a staged process it will likely be Mount Kumgang.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the authors alone.

Picture uploaded to Wikimedia Commons by Allen R Francis

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