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North Korean-made sneakers may trip $29 billion US trade pact

Bloomberg

North Korean-Made Sneakers May Trip $29 Billion U.S. Trade Pact

6 March 2006

March 6 (Bloomberg) — North Korean workers stitching Made in Korea labels on $150 sneakers may hold the key to a $29 billion free-trade agreement between the U.S. and South Korea, the biggest U.S. accord in a decade.

The 6,000 North Koreans, working 48-hour weeks for 1/20th of the pay of their southern colleagues, are churning out pots, sneakers and clothes in a South Korean-funded business park just north of the demilitarized zone that separates the two Koreas.

South Korea’s government is counting on free-trade status to help lure local and overseas companies to the park near Gaeseong, an ancient capital of united Korea. The U.S. says goods made north of the DMZ won’t qualify for special treatment.

``The free-trade agreement must be expanded to include Gaeseong products,’’ said Kim Dong Keun, chairman of the park’s management committee, in Gaeseong. ``I understand that nothing has been set in stone. The matter is still up for negotiation.’’

At stake is an accord forecast to boost U.S. exports by $19 billion and lift imports from South Korea, the U.S.’s seventh- largest trading partner, by $10 billion. Talks may start as soon as this month.

The U.S. last year exported $29 billion of goods to South Korea and bought $43 billion of Korean imports, according to the South Korean Ministry of Foreign Affairs and Trade. The U.S. is the country’s third-largest trading partner.

``The starting point is that an FTA applies to goods originating in the U.S. and the Republic of Korea,’’ Alexander Vershbow, the U.S. ambassador to South Korea, said at a seminar with economists in Seoul on Feb. 14. ``How Gaeseong is treated under the free-trade agreement is going to be a complex issue.’’

Europe Waives Duties

South Korean Trade Minister Kim Hyun Chong said at a Feb. 2 press conference with U.S. Trade Representative Rob Portman in Washington that his government expects goods made in Gaeseong to be part of the trade deal. Portman said the agreement would only cover goods produced in South Korea.

``This is a negotiation between the United States and the Republic of Korea,’’ Christin Baker, Portman’s spokeswoman, said March 2. ``Its provisions will apply to goods originating within the territories of the two parties.’’

Singapore on March 2 implemented a free-trade agreement with South Korea that eliminated tariffs on all goods, including those from the North Korean industrial zone.

The European Free-Trade Association waives duties on Gaeseong goods if more than 60 percent of the product is sourced from South Korea.

Delayed Plans

At Gaeseong, Moon Chang Seop, president of South Korean shoemaker Samduk Stafild Co., is delaying his expansion plans until the U.S. talks end.

Moon’s company is among 15 South Korean enterprises to have opened factories in the zone since June 2003. He’s hoping to shift all of his $50 million annual production from the southern city of Busan.

``It all depends on whether the U.S. can accept products made in Gaeseong as South Korean-made,’’ said Moon, 55, as North Korean music played to rows of uniformed seamstresses in his factory. ``If the U.S. won’t budge, I won’t be able to move our main plant.’’

Seoul-based Hyundai Group, which controls the world’s largest ship-builder, began developing Gaeseong after a landmark summit in 2000 between then South Korean President Kim Dae Jung and his northern counterpart, Kim Jong Il.

The 10-hectare (25-acre) park borders Gaeseong city, the capital of Korea’s Goryeo kingdom from 918 to 1392. It’s ringed by a 2-meter-high (6.5 feet) fence and guarded by North Korean soldiers armed with pistols and semi-automatic weapons.

More than 300 trucks cross the heavily fortified demilitarized zone every day, carrying in raw materials from the South and carting off finished products. Gaeseong is an hour’s drive from both Seoul and Inchon, the nearest South Korean port, and two hours from Pyongyang.

Golf Course

The South Korean government is spending $220 million to expand the site to 330 hectares by 2007, with 24 new tenant companies already building plants.

By 2012, factories will cover 26 square kilometers (10 square miles), according to the Gaeseong committee. It plans to build a supporting urban area of 40 square kilometers, including a 36-hole golf course.

About 730,000 North Koreans, or almost 3 percent of the communist nation’s population, will be housed there by then, said Kim, the committee chairman.

South Korean companies are paying the North Korean government $57.50 a month for each worker, according to Kim. Of that, North Korea collects at least $7.50 in what it calls a social tax.

By comparison, the average monthly wage for factory workers in the South is more than $1,000, according to Hyundai.

Gaeseong isn’t the only obstacle to a trade accord that may be the biggest negotiated by the U.S. since its 1994 North American Free Trade Agreement with Mexico and Canada.

Agriculture, Autos

U.S. officials also will push South Korea to cut trade barriers in agriculture, auto, pharmaceutical and services industries, according to a Feb. 9 report by the research department of the U.S Congress.

South Korea last month reduced quotas on Korean movies to allow more U.S. films to be shown in cinemas and lifted a two- year ban on U.S. beef imports, paving the way for talks to start.

It also agreed to accept some U.S. auto imports, temporarily exempting them from emission rules that are tighter than U.S. federal standards.

U.S. Trade Representative Portman and South Korean Trade Minister Kim said on Feb. 2 that both parties aim to sign an agreement by the end of this year.

At Gaeseong, Oh Sung Chang, the senior managing director of South Korean package maker Taesung Hata Co., is biding his time.

Taesung Hata, which makes cosmetics cases and casings for brands such as Stila, Bobby Brown and Shiseido, plans to quadruple its initial $14 million investment in Gaeseong in the next few years, Oh said.

``Of course, the outcome of the trade negotiations may influence our decision,’’ he said, as North Korean workers assembled compact-powder casings in the Taesung factory. ``We await a favorable outcome.’’


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