IAM News

Korea Trade Agreement Would Subsidize North Korea Government

Mon. August 08, 2011

via Huffington Post

WASHINGTON -- In 2004, Hyundai inked one of the best land deals in history. For a mere $12 million, the South Korean car company secured the rights to 50 years of use on over 41,000 square miles of industrial space -- $292 per square mile, only about 10 percent higher than the rate the U.S. paid France under the Louisiana Purchase.

For a manufacturing giant, the Hyundai deal was a dream: plenty of space for factories, room for worker housing and a population that would work for less than half the wages that Hyundai was accustomed to paying for labor in its Chinese factories.

The land Hyundai leased was located in North Korea, just beyond the U.S.-patrolled Demilitarized Zone, which separates the economically depressed, dictatorship-led North from the world's 14th-largest economy in the South. The land deal formed the basis for the Kaesong Industrial Complex: a conglomeration of factories and residencies dedicated to lowering labor costs for South Korean corporations. Over 47,000 North Korean laborers are currently performing work for over 120 South Korean firms doing business in the area.

South Korea defends the arrangement, arguing that working standards in Kaesong are better than in other areas of North Korea, a contention affirmed in an April Congressional Research Service report. But working standards are nevertheless horrifying. Workers officially make a minimum wage of $60.78 per month -- 35 cents an hour based on a 40-hour work schedule -- but South Korean companies have almost no oversight capacity, according to the CRS. Laborers are hired, disciplined and fired by the North Korean government, and the wages are kept low via intense citizen repression.

"They're treated better than other workers in North Korea, which is not inconsistent with it being a slave labor camp," says Rep. Brad Sherman (D-Calif.), one of just a handful of legislators seeking to curtail abuses at Kaesong.

And if a trade deal between South Korea and the U.S. is approved by Congress as expected, products from Kaesong could be sold in the U.S. tariff-free.

"The working conditions in the Kaesong Industrial Complex are among the worst in the world," says Thea Lee, deputy chief of Staff for the AFL-CIO, the largest U.S. federation of labor unions. "Workers have no rights."

Hyundai and the other South Korean firms that use the Kaesong site don't pay their North Korean employees directly -- they pay the North Korean government, which keeps an enormous portion of the pittances for itself. According to the CRS report, up to 45 percent of the official wage ends up going to the Kim Jong Il regime. Sherman says the actual percent taken from the government may be much higher -- workers could receive only $8 a month, he said.

With North Korea pocketing the remainder, the result is a steady stream of cash to the Kim Jong Il regime, which is currently seeking to develop nuclear weapons despite international opposition. The CRS claims the regime currently takes in about $2 million per month, but a 2004 Hyundai estimate suggested that the North Korean government could take in over $9.55 billion from the complex in just nine years if the planned South Korean corporate investments are fully realized. For a country with just $1.8 billion in total exports in 2005, according to the CRS, that is a huge pile of cash.

Kaesong, in other words, is not the sort of arrangement that human rights and national security experts in the United States of any ideological stripe want to support. The global nonprofit Human Rights Watch has excoriated practices in Kaesong for years. Jay Lefkowitz, President George W. Bush's special envoy for human rights in North Korea raised grave concerns about the zone in 2007. But if Congress ratifies the pending trade agreement with South Korea -- a deal negotiated by Bush and tweaked by President Barack Obama -- American consumers will begin paying tremendous new subsidies to the North Korean government through the Kaesong operations.

The U.S. currently has an embargo on all North Korean goods. Under regulations issued by the Office of Foreign Assets Control, nothing made in North Korea can come into the United States, either as a finished good or as a component part of a product assembled in another country, without first being licensed by OFAC. And OFAC is extremely reluctant to issue these licenses -- less than $400,000 in trade has taken place under OFAC licenses with North Korea over the past decade.

But under the South Korea trade agreement currently pending before Congress, the United States would have a new obligation to allow access for products assembled in South Korea that include parts and labor from North Korea. These goods would obtain access to U.S. markets devoid of any tariffs, resulting in big profits for the Kaesong complex and the North Korean government.

"There is nothing to prevent South Korean firms from performing intermediate manufacturing operations in North Korea, and then performing final manufacturing processes (sufficient to confer origin) in South Korea," reads a separate January CRS report.

The Bush administration was aware of the Kaesong concerns, as is the Obama team. Nevertheless, both signed onto a trade agreement under which only 35 percent of the value from goods assembled in South Korea must actually come from South Korea to qualify for tariff-free trading. That would allow up to 65 percent of the value in any South Korean car, for instance, to come from North Korea.

And the existing OFAC rules will not help. The trade agreement requires U.S. laws and regulations to come in line with the terms of the deal, and it explicitly bars the use of licensing programs to regulate trade from South Korea. The U.S. had the opportunity to negotiate an exemption for OFAC licensing under both Bush and Obama, but neither secured such an exemption. If Congress approves the agreement as it is currently written, the U.S. will either have to drop its sanctions against North Korea or face hefty penalties from the World Bank and other international arbiters for violating the deal.

This is not an accident. The current South Korean ambassador to the U.S., Han Duck-soo, was Prime Minister of the nation when Bush first negotiated the trade deal in 2007. At the time, he boasted to managers and employees in Kaesong, "The planned ratification of the South Korea-U.S. free trade agreement will pave the way for the export of products built in Kaesong to the U.S. market."

There's even a specific provision of the deal that allows for a U.S.-South Korean commission to designate Kaesong and similar regions as officially "South Korean" for the purposes of U.S. trade. If Kaesong is eventually deemed "South Korean" by the commission, even goods 100 percent made and assembled in North Korea could be enjoying duty-free access to U.S. markets.

The AFL-CIO, which is lobbying hard against the Korea trade deal, is particularly concerned about the commission signing off on Kaesong products. Tariff-free access to labor costs as low as $60.78 a month could put pressure on companies -- or give them the needed excuse -- to cut American jobs or lower domestic labor standards.

"We're concerned about what will happen in the future, whether those products will at some point be certified and able to be sold in the United States," says AFL-CIO's Lee.

Kaesong has quietly become a major sticking point for House Democrats trying to block the South Korea trade agreement, which could result in 159,000 lost U.S. jobs in the first few years, according to Robert Scott, an economist at the Economic Policy Institute, a liberal think tank. The Obama administration is pushing the Korea deal hard, alongside two other trade agreements with Panama -- a notorious corporate tax haven -- and Colombia, where union workers are routinely murdered with impunity. As negotiations over raising the federal debt ceiling stalled out in June and July, Obama repeatedly referred to the trade deals as easy, immediate ways to create jobs.

"Obama has made so many concessions to Wall Street and the Republicans where he's able to turn to the base and say, 'I had to do that.' We were gonna default on the debt. In April the government was gonna shut down," says Sherman. "This is a completely unforced slashing of what it is to be a Democrat. He didn't have to do this."

Unions and congressional Democrats have some conservative allies on the trade deals. In March, the Tea Party group Americans for Free and Fair Trade sent a letter to House freshmen, urging them to oppose the Korea deal, with Kaesong problems listed among several concerns.

"Even though the U.S. has imposed sanctions on North Korea, this deal allows billions of dollars of U.S currency to flow directly into North Korea through the Kaesong Industrial Complex," read the letter, which was signed by representatives of 20 other Tea Party groups, ranging from national outfits to small local organizations.

Since the Nixon era, the executive branch has been able to negotiate trade agreements under a special process known as Fast Track. Congress must ratify such agreements, but it cannot amend them as it can ordinary legislation. As a result, a host of informal negotiations take place between legislative leaders and the president before a final trade bill is submitted to Congress. Those talks are still ongoing, with a vote on the Korea deal expected in mid-September.

This spring, Sherman and Foreign Affairs Committee Chairman Ileana Ros-Lehtinen (R-Fla.) introduced a bill designed to strip the North Korean subsidies from the trade deal. The bill would put the Obama administration's current economic sanctions against North Korea into law before passing the Korea trade pact. If South Korea challenged the U.S. for violating the trade deal by refusing North Korean goods, the Sherman-Ros-Lehtinen bill would require congressional approval for any changes to the North Korean embargo.

It's not a perfect solution. Even if the bill would help preserve the sanctions, the United States would still be subject to penalties from the World Bank and international trade authorities for violating the trade deal.

And organized labor and the Tea Party face a united lobbying front of nearly every corporate interest in the United States. The U.S. Chamber of Commerce is handling most of the push, but many of the most aggressive Chamber members have formed the U.S.-Korea Business Council, whose membership includes titans from every conceivable American industry, including drugmakers, defense contractors, corporate law firms, mega-banks, oil giants and more.

The Ros-Lehtinen-Sherman bill was scheduled for a markup in April, but Sherman told HuffPost that when the Ways and Means Committee, which is responsible for handling trade agreements, caught wind of the bill, they pressured Ros-Lehtinen to pull the legislation. Both Ways and Means Chairman Dave Camp (R-Mich.) and top Democrat Rep. Sander Levin (D-Mich.) are supporters of the Korean trade agreement.

A spokesman for Camp insisted that the Korean trade agreement "provides no benefits to North Korea," but he did not deny that Camp urged the Foreign Affairs Committee to drop their bill, and declined to comment on whether Camp would support putting existing sanctions against North Korea into law. The Levin's office declined to comment, as did Ros-Lehtinen's office.