SEOUL, Feb. 10 (Korea Bizwire) – Seoul and Pyongyang are both anticipated to suffer repercussions from the latest decision to “completely shutdown” the operation of the joint industrial complex in the North Korean border city of Kaesong, industry watchers said Wednesday.
On Wednesday, the South Korean government said it has decided to indefinitely suspend the operation of a joint industrial complex in North Korea in response to the North’s recent nuclear test and long-range rocket launch.
Along with geopolitical risks and heightened tensions, the suspension is expected to inflict economic damages on the two Koreas, not only in terms of immediate cash losses, but in terms of the consequences the move may bring.
Profits raised from the Kaesong Industrial Complex account for around 1 percent of North Korea’s annual trade, industry watchers estimated. Pyongyang receives 30 percent of the workers’ annual wage estimated at US$100 million.
The figure hovers below the annual production made by South Korean firms in 2014 estimated at $469 million. Industry watchers said the joint industrial park has limited impact on the North Korean economy as the companies bring resources from the South, rather than procuring them from the North.
Despite this, the damage will be a burden to Pyongyang still as the suspension will affect not only the employees standing at 53,000, but their families as well, casting a cloud over the livelihood of some 200,000 people.
Intangible damages are also expected to weigh down on the North Korean economy.
“It seems that Kim Jong-un aims to apply know-how from the Kaesong complex to developing new economic zones. The plan will also be affected by the suspension,” said Lim Eul-chul, a professor at the Institute for Far Eastern Studies at Kyungnam University.
“With the end of the symbolic economic ties with the South, other foreign firms will be less interested on the North’s development of economic zones,” Lim added.
Since May 2013, Pyongyang has designated 26 economic zones, which all have been facing troubles in raising funds.
The suspension will also likely have negative impact on existing free markets in North Korea that traded goods produced from the Kaesong Industrial Complex.
Kaesong-based South Korean companies could also face severe financial damages estimated at hundreds of millions of dollars as Seoul decided to suspend the last vestige of inter-Korean economic ties, which came in response to the North’s recent nuclear test and long-range rocket launch.
Currently, 124 companies are operating in the northern city. Although the industrial park has been playing a symbolic role in maintaining inter-Korean relations, it has also been cited as one of the cash sources for Kim Jong-un’s regime.
The losses from the suspension may also wreak considerable damage on their credibility with business partners.
When the industrial park closed for around 160 days in 2013, the South Korean firms that operated in Kaesong reported a combined damage of 1.05 trillion won (US$876 million) to the Ministry of Unification, although the government’s estimate showed 706.7 billion won.
Kaesong-based firms, however, said the actual amount of damages is not reflected on paper only, as they may lose business partners or face lawsuits.
“There are business partners that ended ties due to the suspension in 2013,” a representative from a Kaesong-based firm said. “We lost quality partners and the ordeal is now repeating itself.”
The companies also said the current rules, which require them to return the compensations when the industrial park resumes operations, need to be revised to provide effective aid to the firms.
In January, the South Korean government decided to reduce the number of local citizens in Kaesong to around 650 from the previous 850 as the North conducted its fourth nuclear test. It again reduced the number to around 500 after its launch of a missile on Sunday.
It marked the first time for the joint industrial park to be closed by the South Korean government.
The Kaesong industrial park has been the last symbol of inter-Korean economic ties as South Korea announced an economic sanction on the North in 2010, known as the May 24 measures, following the sinking of the warship Cheonan.
Industry watchers said the suspension of the industrial park could bring more losses than gains.
“The suspension of the Kaesong park does not mean the blockage of North Korea’s routes to earn foreign currency,” a local researcher said. “We must consider the losses on South Korean firms.”
The Korea International Trade Association on Wednesday urged North Korea to end its provocations as they threaten world peace, adding Pyongyang should make efforts for the normalization of the industrial zone.
“North Korea should realize that there will be no countries willing to make investments on the country if it continues to make provocations against world peace,” the association said.’