Korea: Ce Os Are Lining Up Along The Border

It was like a scene from the days of old. Thousands of pro-Pyongyang baton-wielding college students gathered on Aug. 15 at Seoul National University to press for an early unification of the two Koreas. They clashed with riot police, who won the battle only after five helicopters teargassed the students.

But behind the scenes, the stage is being set for a new era. Since Washington and Pyongyang announced on Aug. 12 that they are moving to defuse a crisis over the North's nuclear program, pressure is mounting on the government of President Kim Young Sam to let South Korean business break down the economic walls that separate the two Koreas. If the U.S. and North Korea maintain their momentum at the next round of talks on Sept. 23, executives expect Seoul to "delink" the nuclear and economic issues, setting off a burst of deals with the North. "We're ready for direct trade and investment in North Korea," says Park Choon, a director at Daewoo Corp., a major trading company.

COMPLICATIONS. The chaebol, South Korea's huge conglomerates, are eager to win access to the cheap, disciplined labor of the North to offset soaring labor costs in the South. South Korean makers of textiles, footwear, and other low-end products, which lost out to cheaper competition from China, would then be able to charge back into international markets. "Given our technological prowess, financial strength, and marketing networks, we should be able to beat the low-priced Chinese," says Beh Dong-Chul, an official of Samsung Co., Korea's largest trading company.

What could complicate the surge of intra-Korean business, however, is Japan. If the U.S. extends official diplomatic recognition to the North, analysts in Seoul expect Pyongyang to approach Tokyo for war reparations, just as the South did in the 1960s. Seoul used the $500 million in Japanese reparations to build Pohang Iron & Steel Co., today the world's second-largest steel company. Now, senior Japanese government officials say they will respond favorably to an appeal from the North. "It's likely we'll pursue a similar pattern," says one official in Tokyo.

In return, South Korean business sources expect Tokyo to demand "fair treatment" for Japanese companies that have been hit by the strong yen and also would like to tap the North's cheap labor pool. Japanese experts are skeptical that the North would rapidly open its economy because it would destabilize the Communist regime. But even in the absence of a full opening, the South's businessmen fear that Japan will start making low-cost components in industrial parks or trade zones.

That could lead to a delicate moment. South Korean companies such as Daewoo have been painstakingly building bases in North Korea, often through third parties. Daewoo, for example, has formal agreements with North Korea to set up eight industrial facilities once it gets Seoul's green light. Hyundai Corp. is studying tourism and a ship-repair project. They would be embittered to find the Japanese, the peninsula's harsh colonial masters, sweeping in on a wave of hundreds of millions of dollars' worth of government money.

PET PIPELINE. Other projects, however, would probably move ahead quickly because they suit the interests of both Koreas, Japan, and their neighbors. Perhaps the biggest winner would be a pet project of Daewoo Chairman Kim Woo-Choong, who plans to lay a $20 billion natural-gas pipeline from Russia to Japan via North and South Korea. Kim, with support from Seoul, is setting up a consortium that includes 12 Korean and Russian companies to study the project. The pipeline could supply all the energy needs of North Korea and much of South Korea's and Japan's as well.

It's that sort of compelling economic logic that is likely to draw both the South Koreans and Japanese into the North. The economic lure may even be strong enough to push Seoul into going along with the U.S. nuclear settlement with Pyongyang, whatever its flaws. Seoul isn't happy, for example, because it suspects the U.S. won't require full inspections of the North's nuclear program.

But neither South Korea nor the U.S. would want the new regime of Kim Jong Il to step back into isolation. So unless something goes wrong at the diplomatic bargaining table, a new era of South Korean--and probably Japanese--involvement in one of the world's most hermetically sealed economies is about to unfold.

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