The Future of the Kaesong Industrial Complex and Liberal Peace on the Korean Peninsula

The security situation on the Korean Peninsula is heading toward its lowest point in recent years, with North Korea’s firing of dozens of ballistic missiles on a single day in November and a potential nuclear test in the coming weeks or months. Few now seem distracted by the shutdown of the Kaesong Industrial Complex (KIC), an inter-Korean manufacturing complex in Kaesong, North Korea. It was a symbol of inter-Korean rapprochement but has remained closed since 2016. 

Has the time finally arrived to confirm that the KIC is a dead project?

One Direction

The Park Geun-hye government announced the closure of the KIC in February 2016 in response to North Korea’s nuclear and missile tests. It claimed that revenues from the KIC had been used to fund North Korea’s nuclear weapons program. Park’s successor, President Moon Jae-in, was unable to deliver on his promise to reopen the KIC, with failed nuclear negotiations between Washington and Pyongyang followed by further deteriorated inter-Korean relations.

The inauguration of the Yoon Suk-yeol government in May 2022 put a nail in the KIC coffin. A conservative president, Yoon has taken a tougher stance on North Korea, making denuclearization a prerequisite for engagement with Pyongyang. In his Liberation Day speech in August, Yoon proposed an “audacious initiative,” pledging massive economic assistance toward the North only when North Korea denuclearizes. He did not even comment on the KIC during his speech.

Legal challenges against the government’s decision to shut down the KIC have also failed. On January 27, 2022, South Korea’s Constitutional Court ruled that former president Park’s 2016 decision to close the KIC did not violate the constitution. It said in the ruling that the economic sanction was appropriate to protect South Korean security and aligned with the international community’s effort to deter North Korea’s nuclear weapons development. Later in May, the court also dismissed a lawsuit filed by one of the Kaesong companies claiming that the government breached its constitutional duty to enact laws to provide compensation for property rights violations. 

Meanwhile, North Korea has not done its part to revive the KIC. Well before its closure in 2016, the Kim Jong Un regime used the KIC as a tool to display its discontent toward and raise tensions with South Korea. North Korea deported South Korean officials, imposed restrictions on the passage of persons at the border, and unilaterally shut down the complex. Four years after its closure by South Korea, North Korea demolished an inter-Korean Liaison Office building in Kaesong in an escalation of tensions on the Korean Peninsula. According to the South Korean Unification Ministry, North Korean authorities operated the facilities at the complex without the permission of South Korean companies that built and owned them.

The Biden administration has also not done anything significant in regard to the KIC. The KIC is only a part of the larger and fundamental North Korea problem and has not been on President Joe Biden’s top agenda when dealing with North Korea. On the one hand, Washington said that it would meet with North Korea if Kim Jong Un is sincere and serious about nuclear discussions. It is seemingly different from Obama’s “strategic patience” by hinting at sanction relief for particular steps with the ultimate goal of denuclearization. However, on the other hand, the Biden administration has resumed joint military drills with South Korea, which had been downsized under the Donald Trump administration. The administration has also publicly criticized North Korea for its human rights abuses. 

Biden’s middle-ground approach between Obama’s and Trump’s policies toward North Korea has not made any significant difference. North Korea’s continued criticism of U.S. policy is that it is hostile and provocative. 

Lessons Learned

Despite all the signs of its low salience in inter-Korean relations, the KIC remains a symbol of inter-Korean cooperation and more importantly represents a liberal peace project on the Korean Peninsula. The idea of liberal peace is still alive.

Economic sanctions have failed to deter North Korea from increasing its nuclear and missile capability. Stronger deterrence can be considered to balance North Korea’s increasing military threats, including positioning U.S. strategic assets in South Korea, redeploying tactical nuclear weapons, strengthening the missile defense system, or enhancing intelligence cooperation. But these assertive measures would raise military tension on the Korean Peninsula and intensify great power rivalry between the United States and China in the region. Military options like shooting down missile launches, striking nuclear sites, or targeting the North Korean leader would not effectively address North Korea’s threats and have the potential to cause massive casualties. Unless one believes that the regime will collapse internally, voluntarily denuclearize, and initiate political and economic reforms, some form of engagement must be factored into the equation addressing the North Korean problem. 

The KIC, therefore, could begin to rise to the surface again as an important part, even a starting point, of engagement.

However, 15 years of stop-and-go experience at the KIC do not paint a promising picture for a new round of inter-Korean economic cooperation. Without learning important lessons from the KIC experience, any reopening will be highly likely to bring about similarly disappointing outcomes.

First and most importantly, there must be a solid understanding of the nexus between economic cooperation and security on the Korean Peninsula. Economic benefits for South Korean companies using cheaper North Korean labor will not create and keep the momentum to operate and develop the KIC. Indeed, the liberal peace thesis has causal mechanisms linking economic ties to security. They include creating greater opportunity costs that constrain North Korea’s conflict behavior, sending stronger and more credible signals to each other through self-inflicting or enduring economic costs, and changing domestic stakeholders’ preferences and interests away from confrontation and toward more cooperation. The lack of understanding of these analytic frameworks to discuss the security effects resulted in politically polarized and unfounded arguments in South Korea. To avoid the repetition of controversy over the KIC, the security effects of inter-Korean economic ties should be understood, shared, and evaluated by both advocates and skeptics of inter-Korean engagement. 

Domestic support and consensus for the engagement policy are also imperative to avoid committing the same mistakes again. The security effects may take longer to appear and be recognized given that the resumption and operation of the KIC would be limited at the early stage. Even at its full capacity, the KIC would fall short of its initial plan and ambition to expand and create an inter-Korean economic zone. Shorter-term effects are more likely to be economic gains, accompanied by enhanced inter-Korean relations and eased security environment on the Korean Peninsula.

It is important not to be carried away with the reopening because restarting economic cooperation through the KIC will be still a function of security, not vice versa. To evaluate the security effects, political leaders and domestic audiences must agree to take mid- and longer-term perspectives. The first questions would address common security denominators to start engagement and reopen the KIC. It could be North Korea’s verifiable freeze on nuclear activities coupled with halting nuclear and missile testing. Or it could occur at a later point when a peace treaty is negotiated and reached to end the Korean War. Other controversial issues about payment methods, human rights, and economic efficiency of the complex must be also addressed to increase domestic support.

Getting Back to Reality and Ground Zero

The current security situation does not offer a realistic timeline for when the KIC, in the grand scheme of engagement, can be discussed and launched again. Nuclear negotiations have not resumed. The South Korean government does not show any sign of changing the course of its policy. The Biden administration does not seem to rank the North Korean problem as a higher priority than domestic economic challenges and the war in Ukraine. At a more difficult time, however, it would still be better to get back to the basics and review the performance and challenge of the past KIC project and engagement policy. 

The fundamental question of how to deal with North Korea remains the same despite heightened tension on the Korean Peninsula. It will remain unanswered without preparing a new approach to engage North Korea.