Relations between North and South Korea deteriorated to their worst condition in years as Pyongyang announced it would cut all ties with Seoul and expel some South Koreans working at a joint industrial park in the border city of Kaesong.
The reaction came amid rising tensions after an investigative report concluded that North Korea was to blame for sinking a South Korean naval vessel in March, killing 46 sailors.
South Korea on Tuesday resumed propaganda broadcasts across the North-South border. The North has threatened to fire artillery shells at South Korean loudspeakers used in the broadcasts. Pyongyang also said it will resume its own broadcasts.
Reports also said the North had ordered its military on high alert and that South Korean ships and aircraft would be prohibited from passing through its territory.
Restrictions On Trade, Travel
In addition to taking its complaint against North Korea to the U.N. Security Council, South Korean President Lee Myung-bak said Monday that his country would cut off much of its trade with the North.
Lee also said North Korean merchant vessels will no longer be allowed to use a shortcut through South Korean waters, a move that would force the North Korean ships to expend more time and fuel.
But analysts say the measures won't be enough to change the North's behavior.
An international investigation found that the explosion of the South Korean warship Cheonan on March 26 was caused by a torpedo launched from a North Korean submarine.
North Korea has denied any involvement in the sinking and said it would treat the South's retaliatory measures as an act of war.
U.S. Backs South, Looks To U.N. Action
The United States has fully backed its ally South Korea. Secretary of State Hillary Clinton was in Beijing Tuesday seeking support from China on U.N. Security Council action against North Korea. She was headed later Tuesday for meetings Wednesday in Seoul.
The United States maintains a deterrent force of about 28,500 troops in South Korea, a military legacy from the 1950-53 Korean War, which ended with an uneasy armistice.
Analysts say the real danger amid the current tensions may come if North Korean ships decide to test the South Korean blockade, running the risk of provoking another conflict at sea. In what may be an effort to warn the North Koreans away from such a confrontation, the Pentagon has said the U.S. Navy would join South Korea's navy in anti-submarine-warfare exercises "in the near future."
Given North Korea's bellicose statements so far, it's not clear how its military would react in a confrontation at sea.
"I think everybody's trying to get the mix just right," says Thomas Hubbard, a former U.S. ambassador to South Korea. "To have measures that are strong enough to teach a lesson, but not so strong as to create a retaliatory cycle."
Will Sanctions Hurt North Korea?
North Korea exports minerals, such as construction sand, and some farm products to the South. The loss of that trade could amount to more than $250 million a year. That's relatively tiny by the standards of most industrial countries, but because the North is so impoverished, experts say the loss will be felt.
"That's enough to have an impact on North Korea's economy," says analyst Jack Pritchard, "but it won't be a decisive impact." Even so, Pritchard, the president of the Korea Economic Institute in Washington, says the sanctions are "a necessary step" to express South Korean anger over the attack.
Pritchard says the South's action leaves North Korea in a weaker position, with little trade beyond what it has with its major trading partner, China.
North Korea's trade with the South was a source of foreign exchange currency, which the North then used to buy items such as fuel and machinery from China, commodities that are especially important to the North's large military.
But the trade situation between the North and South has been deteriorating over the more than two years that Lee has been in office, says Charles Armstrong, director of the center for Korean studies at Columbia University.
A former executive at Hyundai Corp., Lee is a conservative politician who has taken a tougher line on North Korea than several of his predecessors. Trade between the two countries fell by an estimated 10 percent last year.
China Steps In
Armstrong notes that China already has wide investments in North Korea, and he says it will probably take up much of the slack caused by the South Korean trade cutoff. Both China and South Korea view the North as an important source of low-cost labor.
One major exception to the trade cutoff is the Kaesong industrial complex, an area in North Korea where more than a dozen South Korean companies have built or are building manufacturing plants to be staffed by North Korean workers.
Activity at the Kaesong complex amounts to more than half the trade between the two countries.
It's already a significant source of income for the North, where workers are believed to earn a total of more than $40 million a year in hard currency wages. South Korean economists believe it could eventually employ more than 700,000 North Korean workers.
Hubbard says South Korea would be reluctant to shut the project down. "More than trade, [the South Koreans] see this as laying the basis for future relations," Hubbard says.
He adds that if the Kaesong complex were shut down, the loss of jobs would very likely stir a strong public reaction that even the North Korean leadership would have to pay attention to.
One thing that's not clear to economists is how much criminal activity contributes to North Korea's economy.
According to the U.S. State Department, North Korea "is also thought to earn hundreds of millions of dollars from the unreported sale of missiles, narcotics and counterfeit cigarettes and currency."
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