North Korea rarely enters the media unless it is bad news: rockets being shot over Japan, saber rattling with the United States, or nuclear testing. Yet there is another reality – that of North Korea as a product finishing destination. This recently came to light in the Rip Curl case, where I helped calm the waters over what had threatened to engulf the company in a wave of negative criticism. That piece, “Rip Curl’s North Korea Scandal Is Actually A China Rules of Origin Issue“, detailed how it is common for Chinese factories, and particularly those in the Dongbei (North-East) region of China, to subcontract finishing of products to North Korean factories across the border. Many of these factories are in fact Chinese invested. The basic reason is twofold – firstly, North Korean wages are about 25 percent of those payable to Chinese factory workers in the North-East, and secondly, because they can.
What caught many people by surprise are the internationally agreed “Rules of Origin” guidelines, which determine how much locally sourced material and processing must go into a finished item and still permit it to have a “Made in China” label. That amount varies depending upon the product, but it is rarely 100 percent. In fact in terms of garment finishing – sewing on buttons, collars, cuffs, inserting zippers and so on, which is what would have been happening in Rip Curl’s case – it can be as high as 40 percent.
It is entirely conceivable that Rip Curl didn’t know about this. But it does demonstrate that their China lawyers were somewhat sloppy in their contractual due diligence. If you don’t want products to include outsourced finishing in third countries, put it in the production contract. North Korea is just next door, and I have visited factories in the DPRK where very well-known brands are being finished there, for shipment back to China, where the fixing of a “Made in China” label is carried out, and the product then re-exported to its ultimate market in Japan, South Korea or the United States. I take a somewhat perverse pleasure in knowing that it remains entirely possible that Donald Trump may in fact be wearing items finished in the DPRK.
Much of North Korea’s beef of course has to do with the United States, although the international community, including China, certainly do not approve of their nuclear testing. China recently joined with the Americans in approving additional sanctions on the country following the latest tests, although frankly it remains unclear what else can be done to further squeeze a regime already sanctioned to the hilt.
Recent American blog comments elsewhere suggest that North Korea’s business environment is similar to that of China and provides (second hand) anecdotes to illustrate that. However, such comments are misguided, potentially dangerous, and in terms of encouraging American companies to look at the DPRK market while it remains under sanctions, illegal. It is naive in the extreme to suggest that the DPRK business environment is the same as China’s. Doing business in North Korea is not at all like doing business in China. I should know: my firm was asked back in 1999 to establish an investment office to be seated in the North Korean Ministry of Commerce building in Pyongyang. I was also hired, and carried out, a project to assist the DPRK write their foreign investment laws, which mainly consisted of answering questions about China’s relevant legal structure and sending the DPRK Minister of Commerce a series of books about Foreign Investment Law in several other countries. North Korea’s Foreign Investment Laws have, and I quote a local law firm’s comments, “a surprisingly sophisticated framework of foreign investment and related legislation in place, with dozens of laws and regulations covering numerous aspects of foreign business activity, including a revised dispute resolution law”. Needless to say, our mooted Pyongyang office never materialized, although it was fun to look at it from a potential perspective, and an honor to be asked at the time. The unwise placing of North Korea as part of an “Axis of Evil” by then incoming President George W Bush rather put a stop to any hopes that the country would open up and become a de facto sub-contracting Province of China while maintaining its sovereignty. We’ll never know what could have been.
North Korea does however have a number of well-established experts, for want of a better word, in situ, with a rare handful of expatriates having made the country their base for business for upwards of two decades now. If that doesn’t qualify someone as being an “expert”, when so few have ever been to the country, let alone regularly visited it, then I don’t know what does. But I can assure readers it is nothing like China. I wrote an article about China’s trade with the DPRK, “China’s Trade With North Korea“, fairly recently, which outlines the trade and investment support given by China to the North Koreans. Although my hope for a rapprochement at the time has not materialized, it does outline the hard trade support the Kim regime still enjoys.
The Asia Briefing bookstore meanwhile regularly features North Korea business intelligence reports. These are sited under the “Partner Publications” section on our Bookstore and are free. The country remains a pariah, and its bellicose attitude doesn’t win it any friends. Yet overall, the United States diplomacy towards the country hasn’t been the best either. I don’t especially recommend investing in North Korea as an alternative Asian destination: it is too prone to sudden disruptions in trade, and there are the sanctions to consider, although these don’t affect everyone. Nonetheless, it is a fascinating country and I do recommend a visit. Understanding the issues that countries such as North Korea face is key to a more pragmatic and ultimately peaceful response.
International lawyers wishing to keep their clients out of the country should insert clauses forbidding sub-contracting of work to third countries. For the rare and brave souls out there that have ties with North Korea, opportunities are there, as there are in all countries under immense pressures in terms of permitted trade and investment. But it is not like China.
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DPRK Business Monthly: February 2016
The latest issue of DPRK Business Monthly is now available as a complimentary PDF download on the Asia Briefing Bookstore. This regular publication looks at current international, domestic, and peninsular affairs concerning North Korea while also offering commentary and tourism information on the country.
D.P.R. Korea’s Rajin-Songbong Economic & Trade Zone
This UNDP report is a special guide on the climate for foreign investment and foreign transit trade in the Democratic People’s Republic of Korea’s Tumen River Area, specifically focusing on the Rajin-Sonbong Economic and Trade Zone.
The Great Tumen Initiative Investment Guide
The Greater Tumen Initiative is an intergovernmental cooperation mechanism in Northeast Asia, supported by the United Nations Development Program, with a membership of five countries: People’s Republic of China, Democratic People’s Republic of Korea, Republic of Korea, Mongolia and Russian Federation.