Hopes Fade for U.S. Companies Eager to Trade With North Korea

By EVELYN IRITANI

March 3, 1996 12 AM PT

TIMES STAFF WRITER

When word leaked out that the Clinton administration might relax its economic embargo of North Korea in exchange for the shutdown of a suspected nuclear arms facility, New York businessman Allen Wenzel thought of one thing. Magnesite.

Wenzel’s wish was granted when a historic agreement was signed in Geneva in November 1994, opening up limited trade channels between the longtime ideological enemies in exchange for North Korean compliance with an international nuclear arms control treaty. Buried in the agreement was a clause allowing U.S. firms to import magnesite, a mineral used in steelmaking, from North Korea.

But more than a year later, Wenzel’s firm, Minerals Technology, has brought in just one shipload of the valuable white mineral from North Korea. And although it has an agreement with the North Korean government for “additional quantities,” there are no more shipments scheduled.

After all the high hopes for commercial deals between the two countries, the small number of U.S. companies doing business with the long-isolated Communist country are finding it tough going. And lately, as the U.S. and North Korean governments lurch from one mini-crisis to the next, prospects appear to be getting worse, not better.

Doors have opened and then unexpectedly shut. Within the last few weeks, top North Korean economic officials abruptly canceled a promotional trip to Los Angeles and Washington and called off a visit by U.S. business people to North Korea. A North Korea presentation at the World Economic Forum in Davos, Switzerland, last month was canceled at the last minute, even though the delegation was already in town.

In a letter to the Institute for International Economics, which had agreed to be the host of the Washington meeting, the North Korean government expressed displeasure that the United States had not moved more quickly to relax the remaining economic sanctions against it.

A frustrated Fred Bergsten, director of the institute, told the North Koreans they were missing a great opportunity to promote their country to interested U.S. companies.

“I think it’s an indication that they’re pulling back from reforms,” he said. “They’re just not ready to put their necks on the line by going out and even talking mildly and tentatively about their economic program.”

North Korea’s on-again, off-again behavior fuels the rumor mill in the United States, which is running overtime given the paucity of hard data.

Possible explanations for the most recent pullback include anger at the United States for perceived slights in the bilateral relationship, embarrassment over recent high-profile defections, a power struggle within the government over the pace of economic liberalization--or perhaps something as simple as a shortage of power to heat the hotel rooms for a foreign delegation.

“Pyongyang is closing the doors on all fronts,” said Kongdan Oh, a Korea specialist based in Washington. “Something is not quite right.”

For U.S. companies, North Korea remains one of the last remaining economic frontiers, a hermit kingdom whose people have been cut off from even the most basic modern amenities. Much of the crumbling infrastructure--roads, bridges, factories--is of early Soviet vintage. When, and if, the doors are finally opened, the country’s appetite will be voracious for everything from power and telephone lines to automobiles, color televisions and toothpaste.

It was chiefly the Soviet Union’s collapse that prompted North Korea to more seriously pursue the free-market policies that have enriched its neighbors in Asia. Another factor is a decline in financial support from the overseas Korean community in Japan, which had covertly been funneling hundreds of millions of dollars a year into the North Korean economy before Japan went into its current recession.

In 1991, North Korea announced the establishment of a special economic zone taking in the areas around the northeastern cities of Rajin and Sonbong, where foreign investors would get tax breaks and other investment incentives.

The special zone is also part of the United Nations’ ambitious Tumen River development project, which links five nations in a trade bloc involving 150 million people, 20% of Asia’s land mass and a combined gross national product of $3 trillion.

But five years later, the economic zone still lacks an adequate power supply, paved roads and other elements of basic infrastructure. About $20 million has been invested in that region, according to North Korea.

South Korea has stepped up trade with the north, and seven companies, including the giant Daewoo conglomerate, have received permission to invest in thenorth, according to the South Korean government. Eastern Dragon Shipping Co. and Tong Yang Cement Co. have permission to operate loading facilities and construct a cement silo in the special economic zone.

But to the rest of the world, North Korea remains an economic black hole. Little data is available, and what exists is suspect.

There is ample reason for skepticism about commercial prospects. In recent months, U.S. companies have watched nervously as diplomats dealt with a series of difficulties, including North Korea’s unhappiness at its inclusion in a new arms control agreement signed by the United States, a breakdown in talks on the return of the remains of U.S. soldiers from the Korean War, and reports that North Korean leader Kim Jong II’s first wife is seeking asylum in Europe or the United States.

In addition to such political instability and the drying up of aid from its benefactor, the former Soviet Union, North Korea has endured a string of economic disasters in the last year, including massive floods and crop failures.

For their part, U.S. companies are fearful of being caught in the cross-fire should relations deteriorate further. Even those who have legally entered into business deals in North Korea are keeping very low profiles.

“The situation is sufficiently unstable there to give great pause to any smart American businessman or businesswoman seeking to invest eggs in various baskets,” said Darren McKinney, a Treasury Department spokesman. “This is a basket which is still rife with risk.”

Under the 1994 agreement, U.S. companies are allowed to open up telecommunications links with North Korea, process North Korean financial transactions and import magnesite. The United States also promised, in conjunction with South Korea and Japan, to help provide fuel oil and a nuclear reactor to compensate for North Korea’s shutdown of a suspected nuclear arms facility.

Last April, AT&T; became the first U.S. company to provide direct-dial international service to North Korea. In addition to Minerals Technology, at least one other U.S. company has applied for a license to import magnesite. And the New York-based Stanton Group, a power plant developer, has established a joint venture to operate a power plant and oil refinery in the Rajin-Sonbong economic zone.

Others, such as Coca-Cola and General Motors, were early visitors to Pyongyang after the thaw in relations. But they are still prohibited from doing business there under the Trading With the Enemies Act. The act restricts U.S. economic contact with so-called “pariah” countries such as North Korea, Cuba and Libya. Therefore, U.S. economic activity with North Korea is limited to humanitarian aid and those few industries specified in the 1994 agreement.

McKinney said “precious few” U.S. firms have applied for licenses to do business in North Korea. He said the department does not want to provide specifics about the applications, citing the high level of concern among the companies that their involvement there not become public knowledge.

North Korea’s Communist leaders have sought advice from their Asian neighbors about reaping the benefits of a market-oriented economy without relinquishing too much political control. But although they have absorbed the language of international commerce, they treat most foreigners, especially those of the capitalist persuasion, as threats to their closely guarded society. This situation is complicated by their unfamiliarity with the complexities of doing business in a market economy, from lending requirements to legal protections.

Some American business officials remain hopeful, if sobered.

Wenzel traveled for two weeks last fall in Pyongyang and the northern region where the magnesite deposits are. He described the railroad as adequate and the facilities in the port of Hungnam, on the east coast, as “excellent” although limited to ships under 15,000 tons because of its shallow depth.

But Wenzel said the country’s serious economic problems, including widespread fuel shortages, have severely restricted its mineral production and wreaked havoc with delivery schedules. U.S. companies must pay upfront so the North Koreans can buy the fuel to get their machinery and trains running.

“It is a country that is basically bankrupt,” he said.

But one company’s headaches are another’s opportunities. TheStanton Group, the power-plant developer, has entered a joint venture with a North Korean company to refurbish and operate a power plant and oil refinery in the Rajin-Sonbong economic zone. That refinery will process the fuel oil being sent to North Korea by theUnited States as part of the framework agreement.

Steven Browne, president of the Stanton Group, compared the present day economy of North Korea to that of China a decade ago, when its Communist leaders were beginning to take tentative steps toward a market economy.

He said North Korea, like its larger and more prosperous communist neighbor, lacks modern infrastructure but has untapped natural resources and a well-trained, low-cost work force. The average annual wage in North Korea is around $500.

Ideological differences have hardly dampened North Korean enthusiasm for U.S. dollars, according to Browne. He said his North Korean partners are eager to work with U.S. companies that can provide badly needed capital and technology as well as access to the U.S. market.

Korean Americans have also been quietly investigating business opportunities in the north, although they are reluctant to publicize these ventures for fear of angering the anti-North Korean lobby in the United States.

But the door must open wider, and remain open, if North Korea hopes to translate this interest into badly needed hard cash. And given the late start and stiff competition from more promising parts of Asia and Latin America, there is little time to lose.

“Even marginal interest and concern are rapidly evaporating,” said Oh, a former Rand Corp. analyst. “Businessmen are very practical. They say, ‘Why should I bother?’ ”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Profile: North Korea

Size: 47,000 square miles (about the size of Mississippi)

Population: 22 million

Capital: Pyongyang

Leader: Kim Jong Il

Government: Highly centralized communist state

Annual growth rate: -1.7%

Annual GNP: $22.5 billion

Per-capita GNP: $923

Value of exports: $800 million

Primary exports: Machinery and equipment, military hardware, iron, steel, minerals, textiles