Extraterritoriality and the Kaesong Industrial Complex
Last week in a post on the latest contretemps surrounding the Kaesong Industrial Complex, I mentioned in passing that 310 KIC origin products were to receive duty-free treatment under the recently completed China-South Korea free trade agreement. The practice of negotiating a specific number of products to receive duty-free treatment would appear to be a prima facie violation of the WTO requirement that preferential agreements cover “substantially all” products, but as Korean economists lamented to me during a visit last week, the China-South Korea pact is low quality. But when it comes to KIC, this kind of selective application appears to be the norm: according to reporting in the Joongang Ilbo, “Korea’s FTA with the European Free Trade Association (Korea-EFTA), consisting mostly of Scandinavian countries, gave tariff breaks to 267 products from Kaesong. The Korea-India FTA gave breaks on 108 products. The FTAs with ASEAN, Peru and Colombia gave breaks to 100 products.”
KIC goods do not receive duty-free treatment in South Korea’s free trade agreements with the US and the EU. I do not know why KIC is excluded from the EU FTA. But contrary to the impression of many Korea watchers, the exclusion of KIC produced goods from the KORUS FTA probably owes more to American Congressional sensitivities over extraterritorial commitments than North Korea policy.
In 2003, the US and Singapore concluded a free trade agreement. As part of its development strategy, the island state has developed close working relationships with its hinterlands which include parts of Malaysia and Indonesia. Specifically, in the FTA negotiations, the Singapore side requested that the definition of its territory include areas designated as special economic zones under Singaporean law. The US Congress acquiesced. Singapore and Indonesia subsequently established special economic zones on two Indonesian islands which came under the FTA agreement. But when allegations were raised regarding labor practices in the zones, Singapore claimed that it could not be held responsible, since Indonesia was sovereign. The lesson that the Congress took away from the episode was that the counterpart government had to be completely accountable: no more FTAs with extraterritorial provisions. This was the situation into which Korean negotiators walked when they requested duty-free treatment of KIC-origin goods under the KORUS FTA.
Once bitten, the US Congress was twice shy. That North Korea is, well, North Korea, didn’t help either. The result was KORUS Annex 22-B, a face-saving gesture creating a binational commission to study the KIC issue with the tacit understanding that the United States would never agree to duty-free treatment under the current economic and political conditions prevailing in North Korea. However, were the situation in North Korea to change significantly, this provision of KORUS could be used to jumpstart economic activity by granting duty-free access.