Friday May 15, 2009

North Korea cancels deal with South on factory park

By Jon Herskovitz

SEOUL (Reuters) - North Korea said on Friday it was cancelling all wage, rent and tax agreements with South Korea at a joint factory park just north of their heavily armed border which has become a focus of friction between the rival states.

North Korean workers prepare clothes at a factory of South Korean apparel maker Shinwon company in the inter-Korean industrial park in Kaesong, just a few hundred metres (yards) north of the heavily fortified Demilitarised Zone that divides the Korean peninsula in this May 26, 2005 file photo. (REUTERS/Lee Jae-Won/Files)

The notice on the North's KCNA news agency came just hours after the South said it was requesting rare talks with the North over the Kaesong Industrial Park, which is their last major economic tie and a source of currency for the cash-starved North.

Analysts say the move was a hard-nosed negotiating ploy by the North but do not think it signals the end of the industrial enclave once hailed as a model of economic cooperation.

"We announce repeal of related regulations and contracts that were made in favour of South Korea," KCNA quoted a letter from the North's Kaesong management office sent to the South.

Destitute North Korea, stung by tightened trade sanctions in response to its defiant rocket launch in April and decision to back away from a nuclear disarmament-for-aid deal, has been looking to obtain more money from South Korean companies there.

North Korea will implement new regulations and "South Korean companies and officials based in Kaesong must unconditionally accept what we notified them, and, if unwilling to implement them, can leave the complex", it said.

The South's Unification Ministry responded by saying in a statement: "The measures fundamentally threaten stability of the Kaesong park and we can never accept them."

South Korea has also called for the immediate release of one of its workers detained by the North at the park for about two months who is suspected of making derogatory comments about the country's communist system.

"North Korea won't go as far as to shut the park down or do anything to that effect," said Koh Yu-hwan, a Dongguk University professor of North Korean studies, who added the North was trying to squeeze more money out of the park now that the aid flow from the South has all but stopped.

INSTABILITY PROBLEMS

Closing the park could cause instability problems for North Korea because it would need to find employment for tens of thousands of Kaesong workers used to factories with steady electrical supplies, heating and air conditioning, all rarities in the destitute state.

In addition, the North, already considered an unreliable business partner, may scare off potential foreign investors by cancelling the massive contract with South.

The two Koreas are technically at war since their 1950-53 conflict ended in a truce, not a peace treaty.

They held their first economic talks in more than a year in April at Kaesong, where scores of South Korean firms use cheap North Korean labour and land to make goods such as shoes and watches at the complex just north of their border.

North Korea said it wanted to revise the terms of operation to increase the wages for its nearly 40,000 workers at Kaesong, whose basic minimum monthly salary of $70 is paid to the North Korean state, and renegotiate land lease terms.

North Korea's already battered economy would likely take a further blow if it made good on a threat issued in recent weeks to conduct a fresh nuclear test. It was hit by U.N. sanctions after its first and only test in October 2006.

North Korea, angered by the decision of South Korean President Lee Myung-bak after he took office a year ago to cut a steady flow of aid to his impoverished neighbour, has disrupted work at the factory enclave to put pressure on Seoul to drop its hard line.

(Additional reporting by Kim Junghyun and Jack Kim)

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