	Developments from March 2010-June 2010

The Kaesong Industrial Complex (KIC) is an industrial park located in the Democratic People's Republic of Korea (DPRK or North Korea) just across the demilitarized zone from South Korea. As of the end of December 2010, approximately 120 medium-sized South Korean companies were using North Korean labor to manufacture products there, employing over 47,000 workers. The complex was planned, developed, and financed largely by South Korea, and it has become a symbol of engagement between the North and the South. The purpose of this report is to provide an overview of the role, purposes, and results of the KIC and examine U.S. interests, policy issues, options, and legislation. First, on March 26, 2010, a South Korean naval vessel, the Cheonan , sank in waters disputed by the two Koreas. However, the Kaesong complex was not shut down, although North Korea threatened to take this step if South Korean loudspeaker broadcasts resumed. The KIC provides the North Korean government with a constant revenue stream of around $2 million a month, by virtue of the share the government takes from the salaries paid to North Korean workers. The KIC and Inter-Korean Relations

The KIC is virtually the last vestige of the range of inter-Korean cooperation projects initiated during the period of détente between South Korea and North Korea from 2000-2008. As shown in Table 1 , the number of South Korean manufacturers operating in the complex has nearly doubled since his inauguration in early 2008. On the one hand, as mentioned above, the project provides an ongoing revenue stream to the Kim Jong-il regime in Pyongyang. On the other hand, the KIC provides a possible beachhead for market reforms in the DPRK that could eventually spill over to areas outside the park and expose tens of thousands of North Koreans to outside influences and incentives. The United States has limited direct involvement in the KIC, which the United States has officially supported since its conception. At present, no U.S. companies have invested in the Kaesong complex, though a number of South Korean officials have expressed a desire to attract U.S. investment. U.S. government approval is needed for South Korean firms to ship to the KIC certain U.S.-made equipment currently under U.S. export controls. The Korea-U.S. Free Trade Agreement (KORUS FTA), which has yet to be submitted to Congress for approval, provides for a Committee on Outward Processing Zones (OPZ) to be formed and to consider whether zones such as the KIC will receive preferential treatment under the FTA (see " Kaesong and the Proposed Korea-U.S. Free Trade Agreement " below). According to the terms of the agreement, the OPZ Committee will pass its decisions to the South Korean and U.S. governments, which then would be responsible for "seeking legislative approval for any amendments" to the KORUS FTA. In March 2011, the office of the United States Trade Representative (USTR) issued a statement that Congress "would need to pass, and the President would need to sign, a law to extend any KORUS tariff benefits to products made in Kaesong or any OPZ." Kaesong-Made Components and the KORUS FTA

Another issue raised by the KORUS FTA is whether intermediate products made in the KIC can enter the United States under the provisions of the FTA if they are incorporated into products that are manufactured in South Korea and that qualify as originating in South Korea. Existing production facilities continued to manufacture and expand.
This purpose of this report is to provide an overview of the role, purposes, and results of the Kaesong Industrial Complex (KIC) and examine U.S. interests, policy issues, options, and legislation. The KIC is a six-year-old industrial park located in the Democratic People's Republic of Korea (DPRK or North Korea) just across the demilitarized zone from South Korea. As of the end of 2010, over 120 medium-sized South Korean companies were employing over 47,000 North Korean workers to manufacture products in Kaesong. The facility, which in 2010 produced $323 million in output, has the land and infrastructure to house two to three times as many firms and workers. Products vary widely, and include clothing and textiles (71 firms), kitchen utensils (4 firms), auto parts (4 firms), semiconductor parts (2 firms), and toner cartridges (1 firm).
Despite a rise in tensions between North and South Korea since early 2008, the complex has continued to operate and expand. The KIC was not shut down in 2010 despite two violent incidents between the two Koreas that year: the March sinking of a South Korean naval vessel, the Cheonan, which was found to be caused by a North Korean torpedo, and North Korea's artillery attack on a South Korean island in November. Indeed, the complex has become virtually the last vestige of inter-Korean cooperation. After the Cheonan sinking, South Korea announced it would cut off all inter-Korean economic relations except the Kaesong complex. It also has reduced the number of South Korean workers—primarily government officials and business managers—at the complex because of worries about them being taken hostage by North Korea.
The KIC represents a dilemma for U.S. and South Korean policymakers. On the one hand, the project provides an ongoing revenue stream to the Kim Jong-il regime in Pyongyang, by virtue of the share the government takes from the salaries paid to North Korean workers. South Korean and U.S. officials estimate this revenue stream to be around $20 million per year. On the other hand, the KIC arguably helps maintain stability on the Peninsula and provides a possible beachhead for market reforms in the DPRK that could eventually spill over to areas outside the park and expose tens of thousands of North Koreans to outside influences, market-oriented businesses, and incentives.
The United States has limited direct involvement in the KIC, which the United States has officially supported since its conception. At present, no U.S. companies have invested in the Kaesong complex, though a number of South Korean officials have expressed a desire to attract U.S. investment. U.S. government approval is needed for South Korean firms to ship to the KIC certain U.S.-made equipment currently under U.S. export controls. The Korea-U.S. Free Trade Agreement (KORUS FTA), which has yet to be submitted to Congress for approval, provides for a Committee on Outward Processing Zones (OPZ) to be formed and to consider whether zones such as the KIC will receive preferential treatment under the FTA. The KORUS FTA says that the executive branch will seek "legislative approval" for any changes to the agreement. The Obama Administration says this would take the form of a law to extend any KORUS tariff benefits to products made in Kaesong or any OPZ.
Another issue raised by the KIC is whether components made in the complex can enter the United States if they are incorporated into products that are manufactured in South Korea and that qualify as originating in South Korea. This possibility is likely to be determined mainly by the KIC's evolution; the more that is produced in the complex, the more products are likely to enter South Korea's supply chain.