Kaesong goods to find export market in India

The South Korean and Indian governments are finalizing a trade concession agreement that will lower Indian import tariffs on some goods produced in the Kaesong Zone. According to India’s Economic Times:

Sounds odd, but some select North Korean goods may soon get special trade concession in India after New Delhi signs a trade pact with South Korea. In fact, the North Korean city of Gaesung will emerge as a major beneficiary as part of the terms and conditions of the India-South Korea comprehensive economic partnership agreement (CEPA), which is likely to be signed soon, sources close to the development told SundayET. The North Korean city is located just 60 km north of Seoul, the capital of South Korea.

Though Indian negotiators initially showed reluctance to such a deal, South Koreans were very keen as many of their companies have invested heavily in the region and set up many factories in that city, using cheap North Korean labourers. Goods produced at Gaesung include low-end engineering products, leather goods, jewellery, chemicals and textiles.

When contacted, commerce secretary GK Pillai confirmed to SundayET that India would extend the same concession to goods produced at Gaesung too. “It’s a matter of 30-40 products which are not very high-end. Those are not cars or steel. Yes, Gaesung is in North Korea, but it’s very much a part of South Korea’s economic co-operation plan. Both the Indian and the Korean (South Korean) governments have agreed to the CEPA, and it should be coming into effect from June or July this year,” he said.

Once the partnership agreement is signed, it will be the first such instance in which India recognises the outward processing concept and gives the same status to goods produced outside the negotiating country with those produced inside. Though Mr Pillai said there was no issue regarding Gaesung, sources close to the development added that India was not very keen on allowing those products.

“India was opposed to the idea as other countries too may demand the same model later. What if a country entering into a trade agreement with India chooses a place in Bangladesh or Pakistan for outward processing,” said a senior government official.

The trade volume between India and North Korea is quite insignificant if it’s compared with that of India-South Korea. During FY08, India’s import from North Korea was worth a mere $161 million, which was 2.6% of that from South Korea. In case of exports, the figures are somewhat better. The total export from India to North Korea was $850 mn in FY08 which was 29% of India’s export to South Korea.

The Bank of Korea, the South’s central bank and most cited source of DPRK economic statistics, estimates North Korea’s gross exports (to all countries except South Korea) in 2006 and 2007 at $950 and $920 (USD in millions) respectively.  They estimate the DPRK’s imports in these years at $2,050 and $2,020 (USD in millions) respectively

According to the data in this article, North Korea’s exports to India ($161 million) are a non-trivial 17.5% of its total exports (assuming the 2007 number is approximately current and changes in inflation and exchange rates are trivial).  The DPRK’s imports from India, $850 million in 2008 (according to the article), are a whopping 42% of North Korea’s estimated 2007 total imports.  Either India is now one of the DPRK’s major trading partners, or there was a short-term spike in DPRK-India trading activity, or these numbers are fishy.

Setting this debate aside, a further question arises—how will these transactions be recorded?  Since the DPRK has a trade relationship with India, will goods from Kaesong be flown/shipped from the DPRK to India and counted as North Korean trade, or will goods be shipped from Kaesong to South Korea and then sent to India—to be counted as South Korean trade? 

My suspicion is that the Kaesong goods will be counted as South Korean merchandise trade since this is a South Korea-India trade deal.  If the goods are recorded as South Korean, agreements of this sort will make it much more difficult in the future to determine the DPRK’s trade volume using mirror statistics.  This is because the country of origin records kept by the DPRK’s trading partners will show goods produced in the Kaesong zone as originating in South Korea.  As a result, the DPRK’s merchandise exports could go underestimated.

Read the full story here:
Ever heard of Gaesung? Gear up for its products
The Economic Times
Shantanu Nandan Sharma
2/15/2009

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