South Korea’s businesses pay the price for Lee’s tough policy toward the North

SEOUL — For much of the previous decade, South Korean leaders encouraged private companies to do business with the authoritarian North, seeing the joint ventures as a chance for both profitmaking and peacemaking. But South Korean President Lee Myung-bak has used a series of increasingly aggressive measures to cut off those deals, in the process forcing South Korean companies into bankruptcy and leaving business executives bitter about Seoul’s policy U-turn.

Lee’s moves were initially intended to pressure Pyongyang to liberalize its economy and give up its weapons program. But they turned punitive — and more intense — after the first of two 2010 military attacks, when Lee vowed to block all imports and exports and cut off shipping lanes connecting the countries.

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A rare visual tour inside North Korea.

Now, those measures have taken dramatic effect, with South Korean executives vowing never again to do business with the North, fearing vulnerability to Seoul’s policy changes.

“The only victims from [Lee’s policy] are the South Korean companies who were dealing with North Korea,” said Lee Young-seung, who ran a coal importing company. “No government countermeasures have been set up to protect us or help the companies that were damaged. I feel let down and neglected.”

Five years ago more than 400 companies were dealing with the North, either importing raw materials such as seafood and sand or using North Korean factories for cheap labor. There are now just a handful, economists say — most notably an automaker whose president took U.S. citizenship so that he could travel freely on the divided peninsula. Since late 2008, the South has routinely denied visas to its citizens.

One exception to Lee’s clampdown is the Kaesong Industrial Complex, a still-growing capitalist enclave just north of the border that is home to more than 120 South Korean companies. Seoul is reluctant to yank support for Kaesong because a closure would force the government to pay hundreds of millions of dollars in insurance to those companies.

“South Korea has a very parochial incentive to not play hardball with Kaesong,” said Marcus Noland, a North Korea researcher at the Peterson Institute for International Economics, “and the net result is, the place continues to go.”

But outside of Kaesong, trade has all but stopped, according to statistics from Seoul’s Ministry of Unification. Non-
Kaesong trade accounted for $791 million in 2007, before Lee came to office. In 2011, non-Kaesong trade totaled just $4 million.

That dropoff will be hard to reverse, economists say, posing long-term implications even after Lee leaves office in February. Both major parties in the South have advocated softer policies toward the North ahead of the December presidential election, but economists say future South Korean governments will struggle to persuade corporations to return to the North, given their bitter experiences under Lee.

“South Korean companies have seen that they are vulnerable to political changes,” said Cho Bong-hyun, a Seoul-based analyst at the IBK Economic Research Institute. “It was a huge setback, if ever South Korea wants to restart that cooperation.”