The Economic Ties Between South, North Korea

MICHELE NORRIS, host:

As we just heard, South Korea's president announced today that his country will stop almost all trade with North Korea. That raised a number of questions for us, not the least of which is: What trade?

For more on the fragile but considerable economic relationship between North and South Korea, we're joined now by longtime Korea watcher Gordon Flake. Welcome to the program.

Mr. GORDON FLAKE (Executive Director, Maureen and Mike Mansfield Foundation): Happy to be here.

NORRIS: First things first, what kind of trade are we talking about?

Mr. FLAKE: Well, from an American perspective or even a South Korean perspective, you are correct to ask, what trade? It's very, very small, about 1.6, $1.7 billion. But from North Korea's perspective it's quite significant. North Korea has very little trade with the outside world. So that small amount, $1.6 billion is about 33 percent of all North Korean's external trade, making South Korea its second largest trade partner.

NORRIS: When we talk about trade, we're talking about the exchange of goods or services. What exactly are they exchanging?

Mr. FLAKE: Yeah, both purchasing basic goods in the North by South Korea, so, sand and other materials that they need for the industry. But the most forward-reaching of them is an industrial zone that during 10 years of progressive government in South Korea was set up just across the border called the Kaesong industrial zone. That accounts for about half of South Korean trade with North Korea. And interestingly, that's not something that's proposed to be on the chopping block right now with this current round of sanctions between North and South.

NORRIS: What goes on in the Kaesong area?

Mr. FLAKE: Mostly light manufacturing or assembly of watches and clothings and garments. These are firms that South Korea still views to be in its own interest because by keeping this process going, they are serving to kind of educate the North Korean populace about the benefits of the type of life that they would hope they would eventually have under a unified Korea.

NORRIS: Could you talk specifically about the nature of this trade, what the stoppage would mean for North Korea and what it potentially could mean for South Korea, as well? But let's start - talk about North Korea first.

Mr. FLAKE: Well, clearly, it means much more for North Korea than it does for South Korea. Some economists in South Korea have estimated that the actual cost to the North Korean economy in terms of hard currency, would be about $200 million. Again, in Washington, that's not a big amount of money. But if you're a hard currency-starved isolated country like North Korea, that's a big chunk of money.

As you might understand, in an autocratic dictatorship like North Korea, the benefits of an international trade are accrued almost exclusively by the leadership and a small number of the leadership. And so, when you're striking at the pocketbooks of those who benefit from trade right now, you're really striking at the leadership, at Kim Jong Il himself. This is not any kind of a blunt, broad instrument of sanctions that you're going to use that's going to hurt the normal people, because they really don't see much of this at all.

NORRIS: And the potential impact on South Korea?

Mr. FLAKE: Minimal.

NORRIS: Minimal.

Mr. FLAKE: I mean, you know, South Korea is, you know, economy nearing a trillion dollars, you know, six, $700 billion a year. And so, you know, $200 million in that mix, or a billion dollars in that mix is miniscule.

NORRIS: What country might fill the void here? If the North can no longer depend on the South to provide these goods, could it depend, say, on China?

Mr. FLAKE: Well, already, China and South Korea together combined account for 80 percent of all of North Korea's trade. The concern on the part of many in South Korea is that if South Korea does pull out, it just leaves a void that China will fill. In some respects, I think those concerns are a little bit overstated, mainly because the economic benefits of investing in North Korea have largely been focused on South Korean firms that have a common language, that have proximity just right across the border.

The Kaesong zone, if you were to shut that down, you know, would not be attractive to Chinese investors because it's on the far side of North Korea, way from the Chinese border and there is no transportation network between Kaesong and China. The transportation network is all focused to the South.

Likewise, last year, the South Koreans shut down their Diamond Mountain tourism development project when the North Korean guard shot and killed a South Korean tourist woman in the back. And there's been a lot of concern the Chinese might come in and take this and run it over.

But your source of tourists are the South. They're the ones who have the interest in going. They're the ones who have the proximity. So I think fears of a Chinese assumption of all of South Korea's economic interests in North Korea are overblown. There will be some growth in Chinese influence, of course. But that comes with risks for North Korea as well because, you know, is then China going to be responsible for 80 percent of all North Korea's trade? It kind of begins to call North Korea's sovereignty into question.

NORRIS: Mr. Flake, thanks so much for coming in.

Mr. FLAKE: My great pleasure.

NORRIS: That was Gordon Flake. He's executive director of the Maureen and Mike Mansfield Foundation. That's a non-profit organization that fosters exchanges between American and Asian leaders.

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