Institute for Far Eastern Studies (IFES)
NK Brief No. 10-06-04-1
6/4/2010
In the aftermath of the Cheonan incident, the Lee Myung-bak administration has sought to strictly punish North Korea with the ‘May 24 Sanctions.’ As North Korea has reacted strongly to the South’s sanctions, there are many concerned over the safety of the ROK workers in the Kaesong Industrial Complex, and the economic implications of the ‘Korean Peninsular Risk’ are evident in the KOSPI and the value of the South Korean currency.
The South Korean government has yet to issue a detailed strategy in response to the Cheonan incident, and appears to risk falling into a quagmire as knee-jerk reactions severing economic ties and the ‘May 24 Measure’ are issued. When the government announced the ‘May 24 Measure’, Seoul stated that all inter-Korean exchanges (with the exception of the complex) were suspended and travel to the North was banned. In addition, North Korea ships are no longer allowed to use South Korean sea lanes and loudspeaker psychological warfare operations will restart along the DMZ.
However, 9 days later, there was still no change in South Korean military operations. An official with the Ministry of Defense stated that the plan of action was still being implemented, but that they were unable to implement the oiginal measures. It appears that the South Korean government is concerned about the response from Pyongyang.
After the announcement of the South Korean measures, North Korea declared that all inter-Korean relations were to be severed and that they would fire upon ROK loudspeakers projecting propaganda into the North. The North also alluded to restricting access for Kaesong Industrial Complex employees and evicted South Korean public officials from the area.
Now, South Korean authorities are contemplating the North’s announcement restricting access to the KIC. If North Korea were to cut off the complex and South Korean workers were trapped in the North, the ROK and U.S. Would have few options outside of the military, and military options, while still on the table, are very unpalatable. The May 24 Measure has impacted the South’s finances, as well. The KOSPI and the value of the South Korean currency are factors in ROK decision making.
The day after South Korea announced the new measures, the KOSPI dropped 5.88 percent. The government took several steps to stabilize the market, but could not push it back to levels seen prior to the announcement. Increasing talk of ‘Korea Risk’ impacts the government’s view on whether to close the Kaesong Industrial Complex. At first, the government decided not to close the complex but did not care whether or not the North ordered its shuttering. However, the concern of overseas investors drove Seoul to take more of an interest. In addition, it appears that international support for the South Korean’s Cheonan incident report will have little influence on the sole remaining inter-Korean economic cooperative venture.
