[NOTEBOOK]Sign a free trade pact with North

The Kaesong Industrial Complex was a constant issue at the Asia-Pacific Economic Cooperation (APEC) meeting in Busan. The industrial complex, which was introduced to foreign investors gathered at a meeting on Nov. 16, was presented as a major inter-Korean economic cooperation project made possible through the combination of South Korea’s technology and capital, and North Korea’s land and labor. Foreign investors showed a great deal of interest in the idea of co-existence between South and North Korea.
However, it emerged as a major stumbling block in negotiations on a free trade agreement with the Association of Southeast Asian Nations (Asean) that were held in another part of the conference building. It was a thorny issue for Singapore and other Asean countries.
Korea asked these countries to acknowledge the country of origin of the products made in the Kaesong Industrial Complex as South Korea, but some of the Asean countries expressed strong objections to the request. The main reason for their concern was that South Korea might build more factories in other areas of North Korea, manufacture goods at a low cost and then disguise them as South Korean products, which enjoy tax benefits.
If products from the Kaesong Industrial Complex were to be exported with a “made in North Korea” label, subject to high tariffs, South Korea’s strategy to use the industrial park as a new export base would be greatly damaged.
The dilemma we face now in connection with the country of origin issue derives from the fact that the view on inter-Korean economic cooperation differs inside and outside of the country.
Inter-Korean economic cooperation is based on a principle that defines “the commodity transactions between North and South Korea as internal national business deals,” according to the Basic South-North Agreement signed in 1992 that stipulated the relationship between North and South Korea not as that between sovereign states but as a “provisional special relationship.”
Based on the agreement, we have been able to export and import goods with no tax and visit each other without visas, as if we were visiting our neighborhood. The Inter-Korean Trade Cooperation Act, which was revised in April for the first time in 15 years, states that the trade between North and South Korea is “national trade.” The government at the time boasted, “We have provided a legal ground that allows North and South Korea to trade products without going through a complex process and with no tax.”
Is that really so? International society’s view of the matter is quite different from ours.
According to the regulations of the World Trade Organization (WTO), North Korea is a separate economic entity in its own right with independent tariff zones. That means that if South Korea considers trade with North Korea an internal transaction and gives North Korea such benefits as a tax exemption, the same benefits should be given to other countries too. If not, it is the opinion of the international trade community that we are breaking the WTO rule that “all countries must be treated equally.”
The blame for the international community’s failure to acknowledge that trade between South and North Korea is an internal transaction rests largely with us.
In 1967, when South Korea became a member of the GATT (General Agreement on Tariffs and Trade), the predecessor of the WTO, we left out the exception clause that recognized “trade between North and South Korea is internal trade.” We might not have much to regret now if we had looked just once at West Germany’s membership application that had included an exception clause that clarified that “trade with East Germany is considered internal trade.”
The fact that there are so many different views among Koreans is also a big problem.
The Bank of Korea has classified commodity transactions between North and South Korea as trade with a foreign country in its statistics on imports and exports since 2003. We thus have nothing to say if a trading country says, “Your internal papers show that you consider North Korea a foreign country, so how can it be national trade?” This is the reason why the opinion that North and South Korea should clear up the controversy over internal trade by signing a free trade agreement is gaining strength now.
China and Hong Kong actually signed a free trade agreement, the “Closer Economic Partnership Agreement,” in 2003, and they are giving each other such benefits as tax exemptions.
We should not interpret the characteristics of inter-Korean economic cooperation in our own way. Before the problem grows any bigger, North and South Korea must gather wisdom together so that the trade between the two can be acknowledged as internal trade internationally.

* The writer is a deputy business news editor of the JoongAng Ilbo.

by Hong Byeong-gee