Koreas Rattle Sabers in Public, While Trade Quietly Expands

Shoppers in Seoul's packed markets and hip boutiques may be more and more likely to find an unusual label on some of the goods: Made in the Democratic People's Republic of Korea.

While diplomatic relations with North Korea lurch and retreat in a sea of overtures and slander, and thousands of troops remain vigilant along the border, South Korean businesses are beginning to form joint ventures with North Korean companies.

To be sure, North Korea is still far from an attractive place to do business. There is no investment-guarantees agreement with North Korea, which is known to flagrantly deny agreements or interpret them differently. And if the specter of having one's investment suddenly nationalized isn't always looming, there is virtually no infrastructure to help start a business.

"The South Korean government really wants to see some formal agreements between the two governments before making the big deals, to minimize risk," says Namkoong Young at the Research Institute for National Reunification, a government thinktank.

Nevertheless, South Korean companies will take risks, not just because of their common nationality, but because they are eager to get the lead on foreigners who are watching from the wings. Foreign interest has been slight, but is expected to grow.

Trade between the two Koreas was first allowed by the North in 1988 and is usually carried by shipping companies from third countries.

In a couple of months the South Korean conglomerate Daewoo expects to begin producing shirts, jackets, and bags in three factories built near Pyongyang with a North Korean partner. The $5.1 million investment will employ 1,300 North Koreans and export $20 million to $30 million worth of goods annually. It will be the first joint venture "in history" between the two, a Daewoo official stressed.

Seven other companies have permission to pursue joint ventures. In order to woo Pyongyang to participate in four-party peace talks recently proposed by President Clinton and South Korean President Kim Young Sam, last Saturday Seoul authorized three more companies to engage in joint ventures there.

Samsung plans to be the first to invest in infrastructure in the North, putting in a $7 million, 10,000-line telephone switching system.

Taechang wants to bottle water from North Korean mountain springs, and Daewoo hopes to put $6.4 million toward producing consumer electronics goods. Another 10 companies are waiting for authorization from Seoul.

Intra-Korean trade, as Seoul calls it because it isn't "foreign," quickly grew from $19 million in 1989, to $278 in 1995.

Although a small amount for South Korea, it is now North Korea's fourth-largest trading partner in terms of volume and one of North Korea's biggest export markets.

According to Seoul's Korean Trade and Investment Promotion Agency, the advantage of joint ventures is that the North has a high-quality work force, is close geographically, and speaks Korean.

But Seoul has some stipulations, so companies must receive approval before investing in North Korea. It is worried that companies will recklessly throw nonguaranteed money into the North out of nostalgia for family hometowns left across the border in the North after the Korean War.

PYONGYANG, for its part, is wary about investments, too, and courts them cautiously. It set up an investment zone in the northeast called Rajin-Sombong, just across the Tumen River from Russia, but the area is far from raw materials and transportation.

"Investors looking into going into North Korea tend to get a lot of pressure from [them] to set up in the [Rajin-Sombong] zone, or not anywhere," says one investor.

South Koreans prefer Nampo, a port city 40 minutes southwest of Pyongyang. Ice-free and much closer to South Korea, it could become a major trade artery.

But despite all the delays, lack of trust, and cultural differences, interest remains strong. Daewoo's spokesman says that the company felt the North Koreans were cooperative. Even though it took three years to begin production, the project was never stopped, he notes, only delayed.

Meanwhile, two commercial banks, Peregrine and ING Bank of Netherlands, are setting up offices in North Korea. Shell is building an oil-storage depot in Rajin-Sombong. And a few weeks ago Moscow sent a delegation to Pyongyang for economic and scientific cooperation talks, and discussed the restarting of about 70 Soviet-built factories.