UNCLAS SECTION 01 OF 04 SEOUL 001879

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/K AND EB/IFD
COMMERCE FOR 4431/MAC/OPB/EAP/DUTTON
PASS USTR FOR CUTLER, AUGEROT AND KI
TREASURY FOR IA/ISA/DOHNER AND BUCKLEY
NSC FOR CHA AND COLLINS

E.O. 12958: N/A
TAGS: PREL ETRD EINV SOCI KN KS
SUBJECT: NORTH-SOUTH COOPERATION: DPRK AND ROK REACH
AGREEMENT ON RECIPROCAL DEAL TO ALL RAILWAY TEST RUNS


SUMMARY
--------------


1. (SBU) North Korean and South Korean delegations meeting
on Jeju Island reached an agreement late on June 6 that
should allow the two sides to go forward with test runs of
the two reconstructed cross-border railways located on the
east and west coasts of the Korean Peninsula. Under the
deal, South Korea will lend USD 80 million worth of raw
materials to manufacture shoes, soap and other essentials,
to be repaid at 1 percent interest over 15 years through
shipments of North Korean natural resources. Provision of
the material is conditioned upon the North Korean military
granting permission to allow the railways to go into
service. End Summary.

NORTH-SOUTH MEETING YIELDS BREAKTHROUGH ON RAIL TESTS
-------------- --------------

2. (U) The two Koreas held their twelfth round of official
inter-Korean economic talks on Jeju Island on June 3-6.
The South Korean delegation was led by Vice Minister of
Finance and Economy Park Byung-won. The North Korean
delegation was headed by Vice Chairman of the National
Economic Cooperation Committee Choo Dong-chan.


3. (SBU) Under a deal closed on June 6, South Korea agreed
to provide North Korea USD 80 million worth of raw materials
for light industry -- shoes, soap and clothing -- on the
condition that the canceled test-runs of the two inter-
Korean railways are revived. In return, North Korea will
provide natural resources this year such as zinc and
magnetite, to repay 3 percent of the costs of raw materials
for light industry provided by South Korea. The rest will
be repaid at 1 percent interest over 15 years through
additional shipments of North Korean natural resources.


4. (U) There are nine provisions in the agreement reached on
June 6. In addition to the main agreement, the two Koreas

adopted a key addendum on light industry and natural
resource development cooperation that outlines additional
detailed terms of cooperation. The following are the main
portions of the agreement:

-- Addendum on light industry and natural resources
development;
-- Extraction of gravel from the Han River;
-- Promotion of the Kaesong Industrial Complex project;
-- Preventing floods along the Imjin River;
-- Preventing natural disasters;
-- Joint ventures into a third country in economic and/or
natural resources development;
-- Exchange of economic delegations; and
-- Fisheries, science and technology cooperation.


5. (U) The South Korean government welcomed the agreement on
expanded economic cooperation. However, the South Korean
media noted that it still remains unclear whether the
agreement will be fully implemented due to the history of
the North Korean military attempting to regulate the speed
of inter-Korean economic cooperation projects, including the
Kaesong project.


6. (U) An unofficial Embassy translation of the full text of
the agreement and the addendum signed between the two Koreas
at the talks follows below.

COMMENT
--------------


7. (SBU) Ministry of Unification (MOU) press handlers made a
point of emphasizing the new spirit of "reciprocity" in the
June 6 deal, perhaps missing the irony of negotiating new
benefits for North Korea to get the DPRK to agree to put in
use cross-border infrastructure that was entirely bankrolled
by the South. Many Seoul-based observers noted that if the
provisions of the agreement are properly carried out, both
sides could benefit -- South Korea could receive needed
natural resources while North Korea could resolve chronic

SEOUL 00001879 002 OF 004


shortages of daily necessities such as soap, clothing and
footwear. Still, some doubt whether the agreement can be
implemented, and instead point out that South Korea may give
more than it receives in the agreement because North Korea
lacks proper production facilities of light industry and
poor infrastructure in its mines. Thus, in order for North
Korea to fulfill the conditions of the agreement, North
Korea may request additional assistance in related fields.
End Comment.

-------------- --------------
Agreement of the 12th Round of Inter-Korean Economic
Cooperation Promotion Committee Talks
-------------- --------------

South and North Korea held the 12th round of the Inter-
Korean Economic Cooperation Promotion Committee Talks on
Jeju Island, South Korea on June 3-6, 2006.

At the meeting, the two Koreas discussed issues in order to
further expand and develop inter-Korean economic cooperation
projects based on the fundamental spirit of the June 15,
2000 Inter-Korean Joint Declaration and agreed on the
following:

In relation to the implementation of the first Provision of
the agreement from the 10th Inter-Korean Economic
Cooperation Promotion Committee Talks, the two Koreas
adopted an "Agreement (addendum) on the inter-Korean
cooperation in light industry and natural resource
development" and to put it into effect at the earliest
possible date, as soon as the proper conditions are created.

The two Koreas agreed to discuss and promote a project to
extract aggregation from the mouth of Han River once the two
militaries guarantee security.

Both Koreas agreed to provide conditions to make Kaesong
Industrial Complex (KIC) internationally competitive.

Toward that end, the two Koreas agreed to hold a second
working-level contact for the construction of the KIC in
Kaesong, North Korea on June 20-21, 2006. These meetings
will focus on such issues as simplifying customs procedures
(such as the rapid implementation of the pass system stable
provision for necessary workers), and constructing more
living quarters and amenities for the increasing number of
South Korean workers in the KIC.

South and North Korea agreed to hold the first working-level
contact to discuss flood prevention at the Imjin River on
June 26-27, 2006 and specifically discuss the results of
independent surveys, a plan for conducting joint surveys,
and a flood warning system.

The two Koreas agreed to actively cooperate in preventing
natural disasters such as floods, forest fires, and yellow
dust, and discuss concrete plans by holding a working-level
contact in Kaesong sometime in July, 2006.

Both Koreas agreed to discuss a possible joint venture into
a third country in natural resource development by holding a
working-level contact in Kaesong sometime in July 2006.

The two Koreas agreed to exchange economic observation
delegations when the "Agreement (addendum) on Inter-Korean
Cooperation in Light Industry and Natural Resources
Development" comes into effect.

The two Koreas agreed to discuss and determine a timetable
for a working-level meeting on regarding fishery scientific,
and technical cooperation. In addition, the two Koreas will
form an arbitration committee dealing with inter-Korean
economic cooperation projects.

The next round of Inter-Korean Economic Cooperation
Promotion Committee Talks will be held in Pyongyang, North
Korea sometime in September 2006.

SEOUL 00001879 003 OF 004



-------------- --------------
Agreement (addendum) on Cooperation in Light Industry and
Natural Resources Development
-------------- --------------
In relation to the implementation of the first Provision of
the agreement of the 10th Inter-Korean Economic Cooperation
Promotion Committee Talks, the two Koreas share the
understanding that light industry and natural resources
development cooperation should seek the nation's mutual
prosperity and interests, as well as, actively contribute to
a balanced development of the nation's economies and thus
agreed as follows:

South Korea will supply raw materials of light industry on
credit starting from 2006 that are necessary to produce
clothing, footwear and soap in North Korea. According to
how cooperation in the natural resources development is
carried out, North Korea will pay back the costs with
natural resource products, natural resources development
rights, and/or product disposal rights.


South Korea will supply USD 80 Million worth of raw
materials of light industry to North Korea in 2006. The
North will repay three percent in natural within 2006.

The remaining payment will be deferred for five years,
repaying the principal and interests in evenly divided
payments for ten years. The interest rates will be set at
an annual one percent and in cases of overdue payments four
percent.

Prices of raw materials of light industry and redeemable
materials will be set in accordance with international
market price. North Korea shall not export to a third
country the raw materials of light industry and manufactured
goods supplied by South Korea.

North Korea shall guarantee South Korean experts' site
visits, technical aid, safety for South Korean personnel,
safe operation of transportation means, and other
conveniences so that light industry cooperation can be done
smoothly.

The two Koreas will jointly invest in mines for zinc,
magnesia clinker, and other types of mineral that they agree
upon.

North Korea shall guarantee necessary materials to the
maximum such as mineral prospecting materials, facility-
related materials such as tunneling, mining, and ore
dressing of the subject of cooperation that they agreed upon
as well as infrastructure related materials for
corresponding areas so that natural resources cooperation
can be actively carried out.

North Korea will actively guarantee South Korean experts'
and businessmen's joint field survey, feasibility studies,
installment of necessary facilities and technical aid,
infrastructure such as roads, railways, harbors,
electricity, water, and communication, the coming and
goings, and safety for related personnel, and safe operation
of transportation means.

South and North Korea will determine an all-inclusive
implementing body that will discuss and handle the related
issues and inform it to the other side within one month
starting from the day that this agreement comes into effect.

Any issues that are brought up during the process of
implementing this agreement will be settled through
consultation between the two Korean authorities.

This agreement will come into effect according to the first
Provision of the Agreement of the 12th Inter-Korean Economic
Cooperation Promotion Committee Talks. This can be revised

SEOUL 00001879 004 OF 004


and supplemented according to consultation between the two
Koreas.

VERSHBOW