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Commerce Is Caught in a Crossfire at the DMZ


South Koreans at an industrial park in the North fret about a shutdown

It's a commute that makes rush hour in London or Los Angeles seem positively relaxing. For the 900 South Koreans who work at Kaesong, a capitalist enclave 10 miles inside North Korea, the daily routine involves checking in with Southern soldiers, locking cell phones in a box at customs (they're banned in the North), and passing through the demilitarized zone, a mile-wide stretch of razor wire that marks the world's most heavily fortified border.

The trip to the Kaesong industrial park has gotten even more tense lately. On May 20, South Korea said the North was responsible for the March sinking of one of the South's warships and threatened to cut off trade. The North retaliated with threats of "all-out war" and said it may close the border. "Frankly speaking, I'm nervous," says the South Korean owner of a Kaesong clothing factory. "I stand to lose everything." Like many other Kaesong workers, he asked not to be named.

While the rhetoric escalates, the Kaesong commuters continue to make their way across the border every day. That's because both sides have much to lose from a shutdown. The South Korean government and the 121 Southern companies that operate in Kaesong have invested more than $1 billion there since the park opened in 2003, part of an effort to improve ties between the two countries and give the North a dose of capitalist discipline. For the North, Kaesong provides 40,000 jobs, and most of the workers' pay—some $50 million a year—ends up in the government's coffers. "North Korea has more to lose economically," says Kim Yong Hyun, professor of North Korean studies at Dongguk University in Seoul. But he predicts the North might still close Kaesong if the government feels threatened. "The regime's stability is much more important than economic benefits," Kim says.

That uncertainty is rough on companies at Kaesong. Their biggest fear is that they might be cut off at the whim of the North's "Dear Leader," Kim Jong Il. "The Seoul government has to take some responsibility," says a textile executive. He says production was normal until recently, but orders have since fallen sharply and one of his Southern managers refuses to work in the North.

Fearing that exports to the South may be blocked, managers have limited the supplies they keep on hand. That has sparked complaints from North Korean middle managers who say they can't do their jobs, says Park Heung Jae, chief of a small-appliance factory in Kaesong.

The clothing factory owner, who has invested about $4.8 million in Kaesong, says he has received "zero" orders since the crisis began as buyers worry that their orders may not be met. After Seoul in May suggested limiting the number of South Koreans at Kaesong, he has kept only two Southern managers there instead of the typical seven, though he fears quality will suffer. While relations between workers and managers remain friendly, they're also tense, says a Southern manager at the plant. "No one talks about the warship incident," he says, "even though each of us knows the others know about it."

The bottom line: The Kaesong park was built to help open the North's economy. Now, South Korean managers there fear for their investments.

Kim is a reporter for Bloomberg News. Han is a reporter for Bloomberg News. Cho is a reporter for Bloomberg News.

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