PART TWO - HYUNDAI PRICING QUESTIONED FURTHER and a DISSECTION OF GUN CONTROL OPPOSITION

Part Two - The Story Behind the Pricing of Hyundai Automobiles

In the previous posting dated April 11, 2013 on this blog, the lead article questioned the pricing of Hyundai automobiles sold in the United States and talked about the Kaesong Industrial Complex in North Korea, developed and managed by a Hyundai subsidiary, and where South Korean firms can make things using extremely low paid North Korean workers. Of course, that posting is available for you to review if you wish.  In today's posting, I go into far greater detail and provide more hard information than I did on April 11.

Kaesong Industrial Complex

 

Trade between the United States and South Korea is regulated by the Korean – United States Free Trade Agreement (KORUS FTA), opposed by President Obama in 2008 but supported by him four years later.  Although work was started on this agreement half a dozen years earlier, it was finally passed by Congress in 2011 and went into effect in 2012. 

In the Congressional Research Service paper dealing with the Kaesong Industrial Complex prepared in 2011 prior to the Agreement’s passage, the question was raised as to whether the favorable tariff arrangements included in the Agreement, which were to benefit both the U.S. and South Korea, would apply to South Korean products manufactured with components which came from South Korean companies’ operations in North Korea, specifically in the Kaesong Industrial Complex.  Here is an excerpt from that paper: (highlighting is mine.)

Labor Standards and KIC Potentially Providing a Competitive Advantage

A question has arisen with respect to language in Annex 22-B pertaining to labor standards and

practices in the KIC with due reference to the “situation prevailing elsewhere in the local

economy and the relevant international norms.” Is the local economy in this case that of the

DPRK or that of South Korea, and can products from the KIC be produced under conditions

contrary to International Labor Organization agreements that lay out basic international standards

or worker rights yet still be recommended by the OPZ Committee to be included under the

FTA?

A further issue with respect to the KIC and the KORUS FTA is that if KIC products made with

the low-cost North Korean labor are allowed to be treated as South Korean in origin under the

proposed KORUS FTA, South Korean exporters would enjoy a large cost advantage over their

counterparts in the United States.

Kaesong-Made Components and the KORUS FTA

Another issue raised by the KORUS FTA is whether intermediate products made in the KIC can

enter the United States under the provisions of the FTA if they are incorporated into products that

are manufactured in South Korea and that qualify as originating in South Korea. The same

concern exists with respect to products made in China or elsewhere if they have North Korean

inputs. Currently, discrete goods of North Korean origin may not be imported into the United

States either directly or through third countries, without prior notification to and approval of the

Office of Foreign Assets Control of the Department of the Treasury.

If enacted, the KORUS FTA would likely have only a marginal impact on whether the United

States imports goods that contain KIC-made components. The possibility of goods of South

Korean origin with North Korean content exists now. KIC-made content could also increase due

to the KORUS FTA increasing U.S. imports of South Korean manufactured goods above current

levels. However, whether KIC-made components enter the United States is more likely to be

determined by the future evolution of the KIC itself, rather than by the fate of the KORUS FTA.

If the complex expands, and/or if KIC factories begin to make more components, then South

Korean and other nations’ companies could use them in manufacturing final products, which

could then be exported to the United States and other countries.

All of this information was available to every Representative and Senator who voted on the Korean – United States Free Trade Agreement (KORUS FTA).

I have read the text of the Trade Agreement which was passed and concluded that when it came to the Kaesong Industrial Complex, it avoided the question by including provision for a "committee" which would deal with this problem.   Here is the pertinent citation from the Agreement, from which I conclude that nothing was nor can be done in view of the present state of affairs on the Korean Peninsula.  (The Kaesong Industrial Complex may be considered what is referred to in the Agreement as an “Outward Processing Zone," since it is outside of South Korea.)  Here is the citation from Agreement.  (highlighting is mine.)

ANNEX 22-B

COMMITTEE ON OUTWARD PROCESSING ZONES ON THE KOREAN PENINSULA

1. Recognizing the Republic of Korea’s constitutional mandate and security interests, and the corresponding interests of the United States, the Parties shall establish a Committee on Outward Processing Zones on the Korean Peninsula. The Committee shall review whether conditions on the Korean Peninsula are appropriate for further economic development through the establishment and development of outward processing zones.

2. The Committee shall be comprised of officials of each Party. The Committee shall meet on the first anniversary of the entry into force of the Agreement and at least once annually thereafter, or at any time as mutually agreed.

3. The Committee shall identify geographic areas that may be designated outward processing zones. The Committee shall establish criteria that must be met before goods from any outward processing zone may be considered originating goods for the purposes of this Agreement, including but not limited to: progress toward the denuclearization of the Korean Peninsula; the impact of the outward processing zones on intra-Korean relations; and the environmental standards, labor standards and practices, wage practices and business and management practices prevailing in the outward processing zone, with due reference to the situation prevailing elsewhere in the local economy and the relevant international norms.

4. The Committee shall determine whether any such outward processing zone has met the criteria established by the Committee. The Committee shall also establish a maximum threshold for the value of the total input of the originating final good that may be added within the geographic area of the outward processing zone.

5. Decisions reached by the unified consent of the Committee shall be recommended to the Parties, which shall be responsible for seeking legislative approval for any amendments to the Agreement with respect to outward processing zones.

Hence, because the functioning of this "committee" is purely theoretical, I must conclude that components made in North Korea and included in products which are manufactured in South Korea at this time appear to qualify for the favorable treatment (95% of tariffs waived) that South Korean imports receive. 

Aside from the fact that North Korea's Kaesong Industrial Complex was developed and is administered by a Hyundai subsidiary, let’s now try to find out if North Korea parts are finding their way into Hyundai automobiles, some of which may be imported into the United States.

Giving credit where it is due, the research document prepared by the Congressional Research Service is entitled “The Kaesong North-South Korean Industrial Complex, is dated April 18, 2011 and was written by Mark E. Manyin, Specialist in Asian Affairs and Dick K. Nanto, Specialist in Industry and Trade.  Remember, this information was made available to all members of Congress.  

The full text of the paper, in a very legible format, is available for you at http://www.fas.org/sgp/crs/row/RL34093.pdf.  I recommend you spend a few minutes reviewing it, particularly the Summary at its beginning.  Further excerpts from the research follow:  (highlighting is mine.)

Another issue raised by the KIC is whether components made in the complex can enter the United

States if they are incorporated into products that are manufactured in South Korea and that

qualify as originating in South Korea. This possibility is likely to be determined mainly by the

KIC’s evolution; the more that is produced in the complex, the more products are likely to enter

South Korea’s supply chain.

The 15 companies operating in the Pilot Industrial Complex in Kaesong in 2006 and their

products included Sonoko Cuisine Ware (kitchenware), SJ Tech (semiconductor component

containers), Shinwon (apparel), Samduk Trading (footwear), Bucheon Industrial (wire harness),

Taesung Industrial (cosmetics containers), Daewha Fuel Pump (automobile parts), Munchang Co.

(apparel), Romanson (watches, jewelry), Hosan Ace (fan coils), Magic Micro (lamp assemblies

for LCD monitors), JY Solutec (automobile components and molds), TS Precision Machinery

(semiconductor mold components), Yongin Electronics (transformers, coils), and JCCOM

(communication components).

In 2004, the Hyundai Research Institute estimated that North Korea could receive $9.55 billion in

economic gains over the course of nine years if the KIC were to be developed fully and operated

successfully. This would include $4.6 billion in foreign currency earnings with $700 million

derived directly from the operation of the KIC, $2.5 billion from sales of raw materials and other

industrial products, and $1.4 billion from corporate taxes.  Considering that in international trade

in goods in 2005, North Korea exported $1.8 billion and imported $3.6 billion, the estimated total

gains of $9.55 billion over nine years associated with the Kaesong Industrial Complex would be

quite significant (provided it progresses according to plan).

Of the companies mentioned in the report shown above, let us focus on two of them, Daewha Fuel Pump (which makes fuel pumps for automobiles) and JY Solutec (which makes plastic moulded components such as bumpers, dashboards, door panels, center consoles, etc. for automobiles).  At the time the research document was prepared in 2011, these two companies were still listed as among the over 120 South Korean companies then operating in North Korea in the Kaesong operation. 

   Daewha’s Chairman, Yoo Dong Ok, told Bloomberg.com in March of 2012 "that his company, which also makes parts in plants in South Korea, supplies automakers including Hyundai Motor Co., Honda Motor Co. and Nissan Motor Co."  The company’s web site (http://daewha.en.ec21.com/company_info.jsp) substantiates that they do make fuel pumps for a Hyundai subsidiary.

The web site of JY Solutec lists some of the most well known companies on the planet (http://www.jysolutec.com/eg/html/part/part_4.html) as their customers and of course, includes Hyundai on that list.

While it is entirely possible that the North Korean-made Solutec and Daweha products do not end up in Hyundai verhicles sold in the United States, it is unquestioned that they are used in Hyundai automobiles sold somewhere.  But remember, we really do not know whether or not those components find their way into cars sold in the United States.

But even if, for example, Daewha’s fuel pumps are used in the manufacture of Hyundais sold in India, and not in cars exported to the United States, the overall economies that Hyundai develops by using components made by cheap North Korean labor conceivably can be transferred to the company’s pricing of cars sold in the United States.  

And how cheap is that labor?  

In 2012, wages in the Kaesong Industrial Complex were estimated at about $160 per month, about one-fifth of the South Korean minimum wage, and about a quarter of typical Chinese wage, according to an article in Bloomberg Business Week (January 19, 2012). 

I believe that once the current “crisis” atmosphere existing in our relationship with North Korea passes, the Kaesong Industrial Complex will be operating again.  Perhaps, as its supporters hope, it will improve cooperation on the Korean peninsula and lead to an economic integration of North and South Korea, and ultimately, some sort of unification.   Personally, I believe there is a lot of wishful thinking factored into that viewpoint.  

I would prefer that the Kaesong Industrial Complex, presently closed by North Korea as part of its belligerent posture toward South Korea and the United States, remain closed.  Its reopening would result in greater financial benefits for otherwise financially-strapped North Korea as well as continued unfairly priced South Korean goods being shipped into the United States, at the price of jobs in this country.  



I am not sufficiently naive to believe that the Complex will not eventually reopen.  When it does, however, I would hope that Congress insists upon an amendment to the Korean - United States Free Trade Agreement stipulating that any South Korean products imported into the United States receive the Agreement's favorable tariff treatment ONLY if the South Korean manufacturer is able to certify that no portion whatsoever of the imported product involved North Korean labor. 

  

Did some of the dollars you paid for this automobile end up in the North Korean nuclear program's budget?  We don't know.

Meanwhile, American car purchasers should bear in mind that extremely underpaid North Korean workers are being used by South Korean companies to lower their overall costs and unfairly compete with not only American companies, but with other Asian firms as well.   This probably also pertains to TVs and other appliances supposedly made in South Korea.  It’s something to think about, particularly since the same North Korea which has been taking in large amounts of currency from the Kaesong operation also is the country which is threatening us with nuclear weapons! 

Jack Lippman 

                                                     

Dissecting Opposition to Gun Control

Many opponents of gun control measures, when you get down to their bottom line, really seem to harbor a distrust of our government.  These self-reliant individuals believe that the Second Amendment exists to enable them, as a last resort, to take arms against a government they believe to be oppressive, and therefore, they oppose any measures whatsoever, however minimal, which appear to modify or change that Amendment.

 

I disagree with them. What Thomas Jefferson said about the tree of liberty having to be refreshed from time to time with the blood of patriots and tyrants may sound nice, but it has no pertinence whatsoever in 2013.  I strongly feel that while the Second Amendment prevents the government from infringing on the right of citizens to possess or bear arms, it is not a license for them to commit treasonous acts against the government.  Treason is treason, and should not be cloaked in the disguise of patriotism, even dressed up with a quote from Thomas Jefferson.  

 

There is no justification whatsoever for opposing background checks of all gun purchasers aimed at keeping guns out of the hands of criminals and those with mental disorders.  Senators and Representatives who do so are putting "getting re-elected" above morality.  Comparing these cowards to whores is charitable. 

As for restricting civilian versions of military assault weapons and large capacity magazines, I have yet to hear an opponent of such measures provide a believable reason for allowing their sale and consequently, I must conclude they want such weaponry, “just in case.”  And that "just in case" does not refer to merely deterring a burglar. 

Most legislators are smart enough to recognize all of this.  Some, however, realize that there are enough gullible, if not outright stupid, people in their electorate to deny them re-nomination or re-election because they believe the anti-gun control lies being spread by the NRA and the gun industry.  Shame on such legislators.  Whether Democratic or Republican, they do not deserve re-election.

JL

                                                                     
                                                           

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