SEOUL, South Korea — The relationship between Donald Trump and Kim Jong-un has been dominating the news cycles for months. But while the media focuses on these two leaders, manufacturers in Asia have been quietly eyeing up North Korea as the region's next low-cost sourcing destination.

"Critical conditions for low cost sourcing hubs are low wages and a quick-learning workforce, and North Korea has both. Considering key factors for competitiveness, North Korea has the potential to become a hub [similar] to Vietnam,” predicts Taeho Sim, a partner at A.T. Kearney based in Seoul, South Korea.

Most observers see the June 12th Singapore summit between Trump and Kim as an overture that could lead to further talks. While it is too premature for trade to be high on the official agenda, the lifting or easing of sanctions against North Korea is undoubtedly one of Kim’s objectives.

"I believe sanctions on North Korea will be lifted through the peace process,” says Sim. “The US-North Korea summit talk in Singapore will bring significant progress with the confirmation of CVID [complete, verifiable, irreversible denuclearisation]. And North Korea will get financial aid [if this] is confirmed."

Trump has already said that no new sanctions will be imposed on Pyongyang around the time of the summit — and while the White House has implied current sanctions will not be removed either, trade will be a major bargaining chip in any denuclearisation talks.

Foundations of a garment industry

Ending trade embargoes would have an immediate impact on North Korea, opening it up to business and industry — and fashion would be at the heart of this. “Clothing and textiles is one of the biggest export categories in North Korea, along with mineral manufactured products," says Kim.

The country’s garment and textile industry was estimated to be worth $725 million in 2016, a substantial proportion of its economy, and even with sanctions in place, apparel manufacturing employs a significant number of North Korean citizens in state-run factories around the country. This is largely due to the fact that the textiles category was not included in the UN sanctions list until September of last year.

Peace — or progress toward peace — is certainly not a foregone conclusion at a summit between two of the most unpredictable leaders in modern history and clearly the challenges that lie ahead before North Korea can re-join the international community are huge.

Even in a post-peace scenario, there would be serious and protracted risks related to investing in North Korea. While China and South Korea both have a vested interest in keeping North Korea in a relatively stable condition — not least to lower the number of people trying to escape across the border into their own territories — neither country is able to control the volatility of North Korea’s leadership.

At the end of the day, consumers mainly care about price.

“Inter-Korean relations, and relations between North Korea and the major regional and world powers, means that investing in facilities in the North could lead to bouts of major uncertainty for the companies involved,” says a spokesperson from market research firm BMI.

“Foreign firms investing in North Korea would inevitably have to brace for uncertainty if South Korea elects a conservative president (one less friendly to the North) in 2022, or if the anticipated ‘denuclearisation’ process (which probably won’t happen as the US envisages it) stalls. Not to mention the possibility of [regime] change in North Korea itself.”

But according to some apparel industry leaders, the potential rewards could outweigh these risks, making the country an attractive proposition for manufacturers in the years to come, particularly those based in neighbouring markets.

“We can’t deny that there is a major opportunity here,” says Gerhard Flatz, the managing director of KTC, a sportswear manufacturer in Guangdong, China. “North Korea [could be] the East Africa of the future, but better placed, and it could play a significant role in Asian manufacturing, as brands urgently have to start relocating their sourcing.”

Manufacturing in North Korea could allow them to move sourcing closer to existing supply chains, while making goods in one of the cheapest labour markets on earth. Wages are less than half of what they are in China and North Korean workers are reported to be “more productive” than Chinese workers. Working conditions are so harsh in North Korea, however, that the ethical dimension of manufacturing there is fraught with problems.

As China focuses on producing more complex, technical garments and Vietnam’s labour shortages continue, a reformed North Korean manufacturing sector could solve a number of regional supply chain problems.

“Companies produce in China not for the prices but for the knowledge,” says Flavien Serra, the director DTL Sourcing. “For many years, low-cost industries have had to move [from China] to countries such as Indonesia and Bangladesh, so the arrival of North Korea on the scene would be welcome and would certainly increase competition between those countries.”

Flatz likens the potential opening up of North Korea to the apparel industry’s move into Myanmar a few years ago. “In these countries, the moment sanctions were lifted and duty-free advantages were applied, manufacturing boomed,” he says. “There was once an image issue with Myanmar, particularly to do with human rights, but now nobody talks about it — at the end of the day, consumers mainly care about price.”

However, violence against the Rohingya minority and the ensuing humanitarian crisis has prompted some business leaders to re-examine their activities in Myanmar.

A worrying race to the bottom

There are already clandestine supply chains bringing North Korean-made clothes and footwear to Western markets. The border city of Dandong in China is an entrepôt for Chinese clothing manufacturers, which send textiles to clandestine factories across the Yalu River in North Korea and label them “Made in China” upon their return. Manufacturers can save up to 75 percent of production costs this way.

“The Chinese have been using North Korean labour in Dandong for years,” says Flatz. “From reports I have read, labour is also transferred over the border. North Korean workers come into China, but are paid significantly lower wages than Chinese nationals, and live, from what I have read, in almost prison-like conditions.”

Western brands are rightly worried about human rights issues in North Korea.

Less clandestine are the inter-Korean border factories, where South Korean firms have manufactured apparel at sites such as the Kaesong Industrial Park. Hubs such as these, however, have often fallen victim to episodes of inter-Korean tension, and Kaesong was closed early 2016.

These existing structures — some legal, some not — suggest that any North Korean factories working openly with major international brands would most likely be run by Chinese or South Korean manufacturers and would realistically become part of their supply chains.

“I believe it will be the Chinese, not the South Koreans, who will take advantage of North Korea,” says Flatz. “There’s already a four-lane highway going from China to North Korea, and we could easily see a spate of Chinese privately owned factories with North Korean government ties popping up.”

Juan-Perez Carpena, vice-president for footwear sourcing at Sears, disagrees. “I can see South Korean companies taking the first step to develop the industry as they speak the language,” he says. “It is simply a matter of time before this happens. I don’t see any difference between North Korean manufacturing and other countries with similar characteristics, such as Vietnam in the 1980s.”

Compelled to upgrade and improve standards

International brands may be wary of openly working with North Korean factories, due to the stigma attached to a country where working conditions have been likened to slave labour by human rights organisations. Both Flatz and Perez said they imagined factory conditions in North Korea to be similar to those in northern China 25 to 30 years ago.

According to a report by Human Rights Watch, they could be worse. The report claims that the government systematically uses forced labour from ordinary citizens to sustain its economy and that while those required to work at government-assigned enterprises are theoretically entitled to a salary, they usually are not compensated.

Similarly, the treatment of North Korean workers overseas falls short of international labour standards.

The only potential positive to this bleak reality of worker’s lives is that the hope that potential income from international manufacturing deals could give the government the impetus needed to improve factory working conditions.

“Western brands are rightly worried about human rights issues in North Korea,” says Carpena. “So factories will need to comply with all the international requirements of corporate social responsibility.”

While this all remains entirely speculative, the June summit is a sign that further talks could shed some light on the likelihood of sanctions being lifted. If that does happen, it is becoming increasingly likely that North Korea will start playing a more visible role in Asian apparel manufacturing supply chains.

“In the end this is a global circus,” says Flatz. “The people who failed to get into Ethiopia in time will go to North Korea. If that fails, they’ll move somewhere else and the game will continue.”

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