Executives in Seoul vow to never again do business with the North, fearing vulnerability to South Korea’s policy changes. (David Guttenfelder/AP)

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.

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.”

End of Sunshine Policy Era

During the so-called Sunshine Policy Era that preceded Lee, South Korea’s liberal presidents held summit meetings with North Korea’s Kim Jong Il, sent generous aid packages to Pyongyang and opened trade links.

The conservative Lee entered office in 2008 with broad public support to alter that decade-old approach, a shift that coincided with a period of relative peace but didn’t prompt the North to liberalize its economy or improve living standards for its people. Instead, critics say, it merely enriched a family-run government obsessed with its military and its nuclear program.

Lee then moved to condition the South’s economic support on North Korea’s behavior. If the North denuclearized and opened its economy, the South would help like never before, Lee said, promising investment for roads, railways and natural gas projects. Until the North changed, though, the old generosities would be put on hold.

The North responded to Lee’s offer with indignation, launching rockets, testing nuclear weapons, ordering military strikes against the South and, recently, making near-daily assassination threats against Lee.

Private business with the North outside of Kaesong was halved during Lee’s first two years, but it dropped to almost nothing after 2010, when North Korea torpedoed a South Korean warship. Lee called trade and cooperation “meaningless” unless the North ceased provocations.

The economic cooperation director at South Korea’s Ministry of Unification, Yoon Min-ho, said that, particularly since 2010, “it is true that South Korean companies are going through hardships due to the disconnection” of links with the North. But the government, Yoon said, has distributed $46 million in low-interest loans to those struggling companies.

As a result of South Korea’s restrictions on shipping and travel to the North, Kim Jung-tae, a Seoul-based businessman, says he has lost $30 million in potential earnings, and all of his initial $15 million investment. Kim had hoped to open a clothing manufacturer in 2009 and planned to use a factory in Pyongyang with 600 employees. He’d already been through five years of negotiations with the North Korean government and another five years of factory construction and hiring.

But in April 2009, Kim, who’d traveled to the North 95 times, encountered a problem. The Ministry of Unification would no longer approve his visa.

That meant Kim couldn’t oversee the factory’s opening. And he couldn’t send technicians to train the North Korean workers.

“I called the ministry and appealed, and I have complained several times,” Kim said. “I’ve visited in person. But everything has been denied.”

Kim recently received photos of the abandoned textile machines, corroded and no longer usable. Kim’s bank foreclosed on his home and a commercial property in Seoul. He rents a room from his son. At age 69, Kim says, he has given up hope on his investment.

Business on the decline

As of 2010, the most recent available government statistics, 171 South Korean companies outside of Kaesong still traded with or operated in the North, down from 399 in 2008. But Cho, the economist, says that number has now plummeted to “almost nothing,” and he knows of only one company, the Pyeonghwa Motors Corp., still doing significant business there.

Pyeonghwa has survived because it neither imports nor exports to the South — it simply produces and sells cars in North Korea — and because its top executive, as well as its upper-level Japanese employees, can still travel to the North. The president, Park Sang-kwon, 10 years ago obtained U.S. citizenship — a business decision, he said, to reduce Pyeonghwa’s vulnerability. (He owns a home in New Jersey and has lived in the United States for parts of 20 years.)

Workers at Pyeonghwa’s manufacturing plant in Nampo obtain complete-set part kits from China and Italy (paying royalties to companies such as Fiat and Brilliance) and then produce knockoff models, including one (only recently discontinued) resembling a Mercedes-Benz sedan. Pyeon­ghwa’s biggest customer is the North Korean state itself, which owns 30 percent of the company, and which scoops up vans and SUVs in bulk, generally preferring automobiles in black.

But Pyeonghwa faces some inconveniences both because it operates in a country that lacks a trusted banking system and because it’s headquartered in a country that doesn’t deal with the North. The company calls itself “a bridge between South and North Korea,” but it remits its earnings to Seoul by hiring “hand carriers” who lug bags of cash to China. From there, the profits — $800,000 in 2011 — are entered into the banking system and transferred to the South.

Special correspondent Yoonjung Seo contributed to this report.