South Korean firm quits North factory zone amid tensions

SEOUL, June 9 - A South Korean fur coat maker has become the first firm to pull out of a joint industrial complex in North Korea, officials said on Tuesday, as tensions deepened between the rival states.

North Korea has seen a steady unconditional flow of aid from the South largely cut off after President Lee Myung-bak took office last year vowing to end handouts and instead tie aid to efforts the North makes to dismantle its nuclear arms programme.

Pyongyang has drawn international criticism this year for firing a long-range rocket and conducting a nuclear test. The U.N. Security Council is considering new sanctions against the North.

Analysts said the fur company's decision to leave Kaesong factory park just north of the heavily armed border could prompt others to do the same.

About 100 South Korean firms operate from the complex that is the only major link between the states and was hailed as a model of future economic cooperation when the project began about six years ago.

But trade between the two states in the four months this year has fallen to a quarter of last year's level, South Korea's customs office said.

Samyang Fur's decision to pull out of North Korea came ahead of negotiations between the South and North on Thursday on Pyongyang's demand for higher wage and rent payments from the South Korean firms at the park.

North Korea in May said it was cancelling all wage, rent and tax agreements at Kaesong.

Samyang Fur has seen its orders drop sharply with buyers worrying about receiving deliveries on time after the North began to limit traffic across the border from about the end of 2008.

"A clothing company has notified us of its plan to shut down operations in Kaesong and pull out," a South Korean Unification Ministry official said.

Friction over the factory park, one of the North's few sources of foreign income, worsened after Pyongyang detained a South Korean worker there. It has been holding him for about three months on suspicion of insulting the North's leaders.

"It is true that some companies are experiencing some serious difficulties operating their production line because of recent events," said Unification Ministry spokesman Chun Hae-sung said.

The small to medium sized South Korean firms make goods such as clothing and watches at Kaesong using cheap North Korean labour, which starts at about $70 a month per worker and the salary is paid directly to the North's government.