Inter-Korean Economic Pact Is PricklyNorth Korea Should View Trade With South as Domestic
That the systematic framework for inter-Korean economic cooperation, agreed to by delegates from South and North Korea, is still subject to ratification by the National Assembly does not diminish the historic significance of the preliminary accord.
The recent inter-Korean economic cooperation agreement was designed to guarantee investment, prevent double taxation, settle account payments and mediate trade disputes. The pact obliges the North Korean government to adopt and apply legal standards when accepting investment from South Korean businesses.
The accord also includes provisions that permit South Korean companies to transfer profits to the South without interference, and prevents double taxation. A joint committee comprised of representatives from both countries will mediate trade disputes.
A degree of inter-Korean trade and economic cooperation has already been under way, albeit without the protections afforded by the preliminary agreement. These commercial transactions have been carried out under North Korean law, customary practices and tacit understandings. Trade on this level is limited, however, because South Korean companies are unwilling to risk losses due to the uncertain nature of the North''s commercial practices and attitudes. And while a law on foreign trade has been in place in North Korea for some time, it was not clear that the North would apply the statutes in its dealings with South Korean companies.
Most of the companies that engaged in trade with the North before the pact experienced difficulties. It may well form the foundation on which to build inter-Korean economic cooperation by reducing the uncertainty factor when trading with North Korea.
But while the accord marks a significant step in the right direction, it fails in several respects. In particular, we are disappointed that North Korea is determined to treat South Korean companies as they would foreign enterprises rather than as domestic companies. The joint declaration of the leaders of the two countries clearly stated that South and North Korea would form a balanced economic community. The North''s intention to treat the South as a separate nation is not in keeping with that principle. Under the North''s terms, the international community may not recognize South Korean trade with the North as domestic trade within one nation, but rather as that of a most favored nation. This stands in contrast to Germany, which maintained trade ties between East and West as internal trade rather than international trade. It is inappropriate for the North to treat South as a most favored nation in order to develop its economy.
The German model can be further supported by the special economic zones established on mainland China, which have succeeded largely because of the legal and commercial incentives given to Chinese investors from Taiwan and Hong Kong. In contrast, North Korea''s opening of the Rajin and Sunbong areas has not garnered much interest because the North did not provide any special incentives for Korean residents living in foreign countries or South Korean companies. It was definitely wrong to expect that foreign investors would rush into North Korea at the early stage of the development under the uncertain North Korean laws. If North Korea attracted investments from Korean businessmen, foreigners would have followed.
The South Korean government needs to take a more careful approach regarding this issue. If the government is not cautious in its bid to enter the North Korean market in order to reap profits without considering consequences, it may have an adverse effect on the future of our nation.
Inter-Korean exchanges will only expand if they are based on the rule of law following careful negotiations. We expect the South Korean government to negotiate patiently and North Korea to alter its approach and consider the benefits of unified Korean trade.
The writer is a professor of economics at Yonsei University.>/i>
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