By Mark Tokola

Make no mistake, South Korea’s shuttering of the Kaesong Industrial Complex (KIC) which it had operated just across the border in North Korea since 2004 is a big deal. Far from being a commercial venture of marginal overall economic importance to the two countries, it has been a powerful symbol that no matter how bad relations have at times been between North and South Korea over the past decade, there has been a small lifeline continuing to connect the two countries. Even after a North Korean submarine sank the South Korean naval vessel Cheonan and shelled Yeonpyong Island, killing civilians, in 2010, the South Korean government did not take the step of suspending operations in Kaesong although they did temporarily suspend new investment. The North Korean government for its part has halted operations at the KIC, including for a five-month period in 2013, but the South Korean government has never done so. That they have done so now is a clear expression of the seriousness with which South Korean government takes North Korea’s recent nuclear and missile test.

In 2000, South Korea’s Hyundai Asan Corporation and the North Korean government signed an agreement to construct an industrial zone in North Korea at which South Korean companies would employ North Korean workers to assemble products from parts sent up from South Korea. The Kaesong Industrial Complex began operations in 2004. In the years since, the South Korean government and companies have invested $854 million in the KIC, 124 companies have begun operations there, and KIC employment reached 54,000. The workers were selected by the North Korean government and wages were set by negotiation. The terms under which the KIC has operated have been the subject of contention. North Koreans have demanded wage increases beyond the terms of the agreements and in March 2008 demanded that all South Korean managers leave the KIC. With occasional stops and starts, the two sides have been able to find compromises to keep the KIC operating.

The two sides have derived mutual benefit from the KIC. Although the South Korean companies that operate at the KIC do not provide detailed figures on sales and profits, it has been estimated that production in 2014 was around the level of $470 million. Wages to the 54,000 North Korean workers were around $100 million, of which the North Korean government took a thirty-percent cut. The KIC may have contributed 1 percent to North Korea’s low GDP.

The suspension of the KIC will cost South Korea more than North Korea, narrowly considered, but the overall economic loss to North Korea may be greater. The 54,000 North Korean workers who will lose their jobs support another 200,000 family members. The “middle men (and women)” who were buying and selling KIC products will miss them. The production and management techniques that were being learned at the KIC will be lost. Foreign companies who were considering investing in North Koreas other economic investment zones may have second thoughts. Any notions of creating new South Korean industrial complexes in North Korea can be forgotten for the time being.

But, the political impact of suspending the KIC is greater than the economic one. While family reunions, cultural exchanges, the Mount Kumgang resort in North Korea, Red Cross discussions, and other elements of North-South relations have been dialed up or dialed back over recent years – depending on the state of relations – the Kaesong Industrial Complex generally has kept humming away in the background as a baseline fact that North and South Korea had some kind of cooperative relationship. When I asked a South Korean official in 2010 why they hadn’t closed the KIC after the Yeonpyong-do shelling, he said: “We can’t do that. It is the only thing we have left going with the North. If we close Kaesong, we are back to where we were just after the Korean War.”

South Korea had hoped that North Korean workers at the KIC, even though they were hand-picked by the North Korean government for loyalty and reward, would receive a favorable impression of their South Korean managers and would learn that the private sector could provide a well-run and decent commercial operation. They didn’t expect to transform attitudes in the North overnight, but believed that the KIC would plant seeds that eventually would lead to improved North-South relations. It was an expression of hope.

For the South Korean government to now suspend the KIC shows that they believe North Korea’s nuclear and missile tests have changed the equation on the peninsula. North Korea is pursuing offensive nuclear weaponry heedless of any international or inter-Korean carrots or sticks. The United States and China should note that the South Koreans — the people who know the North Koreans best and have the most to gain or lose — have decided that a new phase has begun.

Mark Tokola is the Vice President of the Korea Economic Institute of America. The views expressed here are his own.

Photo from Konrad Karlsson’s photostream on flickr Creative Commons.