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Summary:
This purpose of this report is to provide an overview of the role, purposes, and results of the Kaesong Industrial Complex (KIC) and examine U.S. interests, policy issues, options, and legislation. The KIC is an industrial park located in the Democratic People's Republic of Korea (DPRK or North Korea) just across the Demilitarized Zone from South Korea. Currently, about 23 medium-sized South Korean companies are using North Korean labor to manufacture products in Kaesong, but projections are for as many 2,000 firms to locate there. The complex was planned, developed, and financed largely by South Korea, and it has become a symbol of the growing level of engagement between the North and the South. The United States officially supports the KIC. The KIC enters into the U.S. policy debate because: (1) South Korea would like the United States to consider products made in the KIC as South Korean in origin for purposes of the Korea-U.S. Free Trade Agreement (KORUS FTA); (2) the KIC has become a growing source of foreign exchange for the communist government in Pyongyang, (3) the KIC is part of the strategy by South Korea to ease tensions with North Korea; (4) the KIC is a part of the DPRK's economic reforms (similar to China's special economic zones) that could lead to greater liberalization in the rest of its economy; (5) the KIC raises issues of security, human rights, and working conditions in North Korea; and (6) U.S. government approval is needed for South Korean firms to ship to the KIC certain U.S.-made equipment currently under U.S. export controls. The language of the proposed KORUS FTA (signed but not yet approved by Congress) does not provide for duty-free entry into the United States for products made in Kaesong. Annex 22-B to the proposed FTA, however, provides for a Committee on Outward Processing Zones (OPZ) to be formed and to designate zones, such as the KIC, to receive preferential treatment under the FTA. Such a designation apparently would require legislative approval by both countries. The fundamental issue with respect to the KIC is whether the United States should support a project that provides revenue to the Kim Jong-il regime in Pyongyang -- considering the regime's nuclear and human rights policies -- and that includes questionable labor practices, even though the project seems to be enhancing cooperation between South Korea and the DPRK, lowering labor costs for Korean businesses, and providing a possible beachhead for market reforms in the DPRK. U.S. policy options include maintaining the status quo of supporting, but not actively promoting, the KIC, using the debate over the KORUS FTA to focus attention on labor and other conditions in the KIC, encouraging reforms in the KIC, providing close oversight to the Committee on Outward Processing Zones (if formed), tightening or loosening sanctions and export controls with respect to the DPRK, encouraging or prohibiting U.S. companies from doing business in the KIC, placing restrictions on South Korean companies that do business in North Korea, and encouraging other countries to (or not to) include the KIC in their respective FTAs with South Korea. This report will be updated as circumstances warrant.
