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Greater Tumen Area Economic Development Project: A Background By Steve S. Sin

January 27, 2010 Introduction: Many in Northeast Asia wish to see the Tumen Basin develop into a place for economic cooperation and competition. One such plan is the Greater Tumen Initiative (GTI), formerly known as Tumen River Area Development Project (TRADP), being carried out under the auspices of the United Nations Development Programme (UNDP). The 20-year 80 billion USD plan calls for the creation of port facilities and transportation infrastructure in the region to support a multinational trade entrepôt. Countries participating in the GTI are China, Mongolia, North Korea, Russia and South Korea. The goal of GTI is to make the area into a free economic zone for trade to prosper and attract investment into the area. For China, the project would give traders in Northeast China easier access to major international ports without having to circumnavigate the Korean Peninsula and thus stimulating growth in China’s northeast rustbelt. For Russia, the project would give the ability to better exploit resources in Siberia and allow easier access to North Korea’s resource-rich hinterland; the area just to the south of the Tumen contains reserves of oil, minerals, coal, timber, and abundant farmland. Originating in Mount Baektu (Changbai), the Tumen River is 505.4 kilometers long. Its 488.4-kilometer upper and middle reaches are the boundary between China and North Korea, while its 17-kilometer lower reaches is the boundary between Russia and North Korea. In a broad sense, the Tumen River area refers to Yanbian Korean Autonomous Prefecture in Jilin, China, the central and southern part of the Primorsky Territory in the far east of the Russian Federation and the Rajin-Sonbong Area (recently renamed Rason Area; hereafter referred to as

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Rason) in North Korea. This area is not only the contiguous area of China, Russia and North Korea, but also the only direct thoroughfare to the East Sea (Sea of Japan) over land. The Greater Tumen Region: The Changchun Agreement of 2005 heralded a geographical expansion, extending the boundaries from the Tumen River Area to the Greater Tumen Area. The geographical coverage of the Greater Tumen Region now involves the three Northeast provinces and Inner Mongolia of China, the eastern provinces of Mongolia, the ports of Chongjin and Rason Special Economic and Trade Zone, a part of the Primorsky Territory of Russia, and the eastern port cities of South Korea. China: Four provinces in China, Heilongjiang, Inner Mongolia, Jilin, and Liaoning, are

actively involved in the GTI. Together, these provinces have a population of over 131 million people and an area of nearly 2 million km2. They are rich in natural resources – Inner Mongolia alone boasts 90% of the country’s proven rare earth oxides and five major coalfields with reserves of over 10 million tons each, while Heilongjiang produces almost half of the country’s oil and is a prime candidate for wind power development. Other resources like timber in Jilin and iron in Liaoning also play a large role in the area. Recent policies have emphasized the revitalization of traditional industrial bases. Changchun in Jilin is home to one of the country’s most important auto manufacturers, First Automobile Works, and Dalian in Liaoning is expected to not only become one of China’s five largest ports (growing to a capacity of 8 million TEU/year) but also become a global player in software and service outsourcing. In this environment of growth and development of industries and markets, the Tumen transport corridor is a vital connection for Northeast China and its neighbors.

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Mongolia: The three aimags (provinces) of Hentii, Dornod, and Sukhbaatar make up the Eastern Mongolian region involved in the GTI. This large (287,600 km2) but sparsely populated area is relatively undeveloped. This is one of the largest (and last) undisturbed steppe ecosystems in the world, and is the core habitat of the Mongolian gazelle. As such, tourism is promising, thanks to the area’s unspoiled natural beauty, cultural traditions and festivals. Currently, agriculture and forestry account for 33% of the country’s GDP, while transport and communications account for 10%, mining and quarrying (especially of cooper, fluorspar, and molybdenum) for 9%, and manufacturing for 6%. Mongolia’s radically changing and privatizing economy means that the government is placing a high priority on developing the country’s natural resource processing sector and also on accessing regional transportation corridors.

North Korea: The Rason Economic and Trade Zone (formerly the Rajin-Sonbong Economic

and Trade Zone) in the northeastern part of North Korea was established in December 1991 to stimulate international trade and investment. The Zone has rich deposits of natural resources, fertile lands that can support a wide range of seasonal crops and livestock, and a developing manufacturing sector focused in industries like port and shipping infrastructure, seafood harvesting and processing, commercial services, telecommunications and tourism. The Port of Rajin, an ice-free port with a capacity of over 3 million TEU/annum, is less than 10% utilized. Rail connections to China are also underutilized. Tax incentives and relatively low land lease and labor costs make the zone an attractive place to invest, while tourism development and continued government support contribute to the ongoing economic stability in the area. The city of Hunchun, China, leased the right to use the Port of Rajin for 50 years in 2005, giving the northeastern Chinese provinces direct access to the East Sea (Sea of Japan). The agreement also provided for the construction of a 5-10 square kilometer industrial zone and a 67 kilometer highway. China envisages that the Rajin area will become a processing zone for Chinese goods which will then be re-exported to southeast China. A Hunchun economic official stressed that the leasing of the port is "a business deal and not a government deal". The South China Morning Post reported from Hunchun that the man behind the deal is Fan Yingsheng, a property developer from Hunan province who put up half the initial capital investment of 60 million euros (70 million USD).

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Russia: Primorsky Territory, rich in natural resources and with a strong industrial and transportation base, is the largest economy in the Russian Far East and the Tumen Region. Formerly dominated by state-run enterprises, about 90% of the enterprises in Primorsky are now privately owned. Coal and non-ferrous metals mining, ship repair, ship building and food processing are the largest industrial employers. The overwhelmingly export based transport industry is also well developed. Five of the ten major Russian shipping companies are based in this area, and strong regional growth in recent years has resulted in greater export volumes, especially for metals and other resources. In addition to the port at Vladivostok, the termini of the Trans-Siberian Railway (TSR) in Nakhodka and Vostochny are also in Primorsky. The TSR is one of the shortest routes between East Asia and Europe and has been a major route for Japanese transit cargo.

South Korea: The eastern ports of South Korea offer some of Northeast Asia’s most robust

transportation and shipping connections, as well as being significant tourist attractions in their own right. Busan, a city of 3.7 million people, is the largest container handling port in the world with capacity of 6.44 million TEU containers per year. Sokcho, a major tourist gateway in northeastern South Korea, offers ferry and container transportation services to both China and Russia. By 2008, Northeast Asia Ferry Company, Ltd. was established as a joint venture between China, Japan, Russia and South Korea. The ferry route connecting Sokcho (South Korea), Nigata (Japan), and Zarubino (Russia) began its full operation in August 2009.

The Inception and Development of the Tumen River Area Development Program (TRADP): The TRADP was first raised by Chinese experts and scholars in the 1990s. On 16-18 July 1990, jointly sponsored by the Chinese Association of Asia-Pacific Studies，East-West Center and the UNDP, the Conference on Northeast Asia Economic and Technical Cooperation was

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held in Changchun, China. The central topic of this conference was the development of Tumen River area and regional cooperation in Northeast Asia. In August 1991, the second conference was held. At these two conferences, for the first time, Chinese experts advocated the idea of developing a regional golden triangle by exploiting Northeast Asia's geographical advantages and suggested international academic research. Henceforth, the development of Tumen River area began to receive attention from the international community. In 1991, the UNDP formally presented TRADP and placed it in the list of key projects of promoting the cooperation between Northeast Asian countries. In October 1991, the UNDP convened a conference on TRADP in Pyongyang, North Korea. At this conference, Northeast Asian countries reached a basic consensus on this cooperative development program. Under this premise, the Program Management Committee (PMC) of TRADP was established. In February 1992, the UNDP convened the first PMC meeting, to which China, Mongolia, North Korea and South Korea sent their representatives. Russia and Japan also attended the meeting, though as observers. Subsequently, the UNDP formulated and promulgated Tumen River Area Economic Development strategies, planning to attract an investment of 30 billion USD (today, the investment amount is expected to be 80 billion USD) in 20 years and build the Tumen River Delta into the “Hong Kong, Rotterdam and Singapore of Northeast Asia". According to the specifications made by international experts in 1994, the Tumen River Area covers an area of almost 70,000 square kilometers, including 42,700 square kilometers of China's Yanbian Korean Autonomous Prefecture, 15,000 square kilometers of North Hamgyong Province close to the Tumen River in North Korea and 10,000 square kilometers in the southern part of Vladivostok, Russia. By the end of 1995, the UNDP organized six PMC meetings and conferences of experts. It also carried out various planning and research programs. In December 1995, at the sixth PMC meeting, China, North Korea, and Russia signed Agreements on the Establishment of the Coordination Committee for Tumen River Area Development; the aforementioned three countries plus Mongolia and South Korea also signed the Memorandum of Understanding on Environmental Problems Relating to the Tumen River Economic Development Area and Northeast Asia and Agreements on the Establishment of the Consultative Commission for the Development of the Tumen River Economic Development Area and Northeast Asia.

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These two agreements and the memorandum of understanding, which call for a change in cooperation progress from research to actual development as the major task, are the milestone in the international cooperation progress. According to these three documents, China, Mongolia, North Korea, Russia and South Korea established a Consultative Commission for the Development of the Tumen River Economic Development Area and Northeast Asia, which is in charge of the cooperation between the five countries and sustainable development. The three countries along the Tumen River---China, Russia and North Korea formed the Coordination Committee for Tumen River Area Development, which mainly deals with economic development affairs, especially the promotion of trade and investment. The UNDP also set up the Tumen Secretariat in Beijing. From then on, the project started its operations and regional economic cooperation entered a phase of substantive development. Achievements of the Tumen River Area Regional Cooperation: TRADP is an international medium- and long-term project. In line with UNDP's planning, this program will take at least 20 years from start-up to trade and investment liberalization, so the implementation of this program will be phased over 20 years. TRADP received active responses from neighboring countries. They took many concrete measures respectively in a bid to promote international cooperation. TRADP was greatly valued and strongly supported by the Chinese government since its deliberation. As far as China is concerned, the development of Tumen River Area is conducted with Hunchun as the key and Yanbian Prefecture as the hinterland. Through adopting a series of measures, the construction of Tumen River Area has achieved substantive progress. First, by signing agreements on harbor-sharing with Russia and North Korea and reaching agreements on opening sea-, air- and land-coordinated transport routes for goods and passengers, China has tentatively attained the goal of going overseas via rented harbors in this area (China has a 50 year lease agreement with North Korea for the use of Rajin [Najin] port). Second, as a state-level development zone, the infrastructure construction of Hunchun Border Economic Cooperation Zone is improving day by day. Noticeable results have been achieved in business and investments attraction; the total

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supply and demand has constantly expanded. Since the development program was implemented, Hunchun conducted energy, transport, telecommunications network and other infrastructure construction, whereby its investment environment has greatly improved. Lastly, with the development of the Tumen River Delta, foreign trade and border tourism in the Tumen River area are flourishing. Apart from the border trade with Russia and North Korea, the volume of spot and transit trade with Japan and South Korea has increased constantly; the trend of tourism development at Mount Baektu and the Hunchun area is also very vigorous. Besides China, other countries concerned adopted a fairly active attitude toward the Tumen River Area Development. To participate in the development of the Tumen River Area, North Korea established a free trade zone in the Rajin-Sonbong area, now called Rason, which lies in the lower reaches of Tumen River adjacent to China. This free trade zone is directly under the administration of North Korea's central government and Chongjin, Rajin, Sonbong and other harbors are opened to the outside world. Furthermore, North Korea's government drew up an overall plan, laid down various rules and regulations and formulated a series of preferential policy for departure, exit, taxation, land use, foreign investment and tariff. Moreover, North Korean government has been increasing investment in this area in order to strengthen the construction of railway, highway, harbor, telecommunications network and other infrastructure construction. Russia, which seems less enthusiastic than the other governments about the project, still seems interested by the prospects of solving one of its oldest problems: how to finance and build the infrastructure and technology base to get Siberia's vast mineral riches out of the ground and to the global

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market. It drew up the Great Vladivostok Plan and a development plan for its Primorsky Territory, ratified the establishment of Nakhodka and Vladivostok free economic zones and opened harbors such as Vladivostok, Nakhodka, Zarubino and Posyet (Pos’et). In order to step onto the world arena via the East Sea (Sea of Japan), Mongolia also took an active attitude toward Northeast Asian cooperation. Mongolia plans to export raw materials and other products via the proposed Tumen harbor. In recent years, to participate in the TRADP, Mongolia has put forward measures of improving its eastern railway network. In South Korea, where natural resources are in short supply, there is growing interest in developing the mineral and energy resources of the Russian Far East. Also, with South Korean labor-intensive industries facing severe manpower shortages, there is a coinciding interest in transferring equipment, technology and funds to China and North Korea. Birth of the Greater Tumen Initiative: In 2005, the member states of TRADP signed the Changchun Agreement which validated TRADP’s direction and confirmed the desire for continued regional cooperation. The member states of TRADP agreed to extend the period of cooperation for ten more years (2015) and to take full ownership of the program through increased contribution of financial and human resources, with the continued support of the UNDP. The result was TRADP’s successor, the Greater Tumen Initiative (GTI), which called for continued regional interaction, more cooperative projects in the region, and intensifying efforts to involve the private sector in development issues. Major GTI-related Activity 2005 - 2010: November 2005: City of Hunchun, China signs an agreement to develop the Port of Rajin

and secures the lease to use the port for 50 years. March 2006: China-North Korea Joint Development Project launched in earnest. The Joint

Development Project includes remodeling Quay No. 3 and building three additional quays (4, 5, and 6) – Rajin Port currently consists of three quays.

October 2007: South Korea planned on discussing with North Korea development of the

Rajin Port with short- and medium-term investments of W150 billion, but the plan was

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delayed (most likely all but scrapped) due to the changes in the South Korean administration and its new North Korea policies.

October 2008: Russia and North Korea began reconstruction of a railroad from Russia's

Khasan to North Korea's Port of Rajin, a project estimated at 150 million euros (207 million USD).

August 2009: China approved development of Changchun-Jilin-Tumen River Pilot Zone

(reported in open media in November 2009). January 2010: Open media reported North Korea and China agreed to repair the railway

linking the City of Tumen with North Korea's Port of Chongjin. The source, requesting not to be named due to the sensitivity of the issue, added Tumen would lend Pyongyang 10 million USD, which will partly fund the restoration of the 170-kilometer-long railroad. Construction is reportedly due to begin in April this year.

January 2010: North Korea announced establishment of a state development bank that will

be responsible for managing the investments from international financial organizations and commercial banks.

Problems Associated with GTI: What has propelled the Tumen River dream along for the past few years, besides the sheer determination of its promoters, are the rapid changes in the political economic climate in Northeast Asia. China, Russia and North Korea are all keenly aware of the vast natural wealth of the area that many consider the world’s last land resource frontier. The hinterland beyond the Tumen contains rich reserves of oil, minerals, coal, timber, and abundant farmland. These resources were the cause of hundreds of years of fierce and bloody competition among Japan, China and Russia. The area around the Tumen Delta itself, with an abundance of fresh water and cheap, flat land seems an ideal base from which to exploit these riches. Cooperative development, unthinkable in the past, has become conceivable since the new found development zeal of China, Russia and North Korea. The enormous potential of the regional market also has played a significant role in the development of the area. The regional market encompasses nearly 300 million people, has a collective GNP of almost 3 trillion USD, and accounts for nearly one-third of world trade.

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Although great progress has been made in recent years, political differences among the players dampen widespread enthusiasm over the success of the Tumen River project. North and South Korea are still at loggerheads over some fundamental issues and relations between the two remain unstable. At the same time, North Korea, while expressing keen interest in developing its side of the Tumen River into a special economic zone, has voiced objection to any economic activity which would imply a surrender of sovereignty over its territory. North Korea also fears economic and political domination by China over the project and consequently over other parts of North Korea’s internal development. Another major potential problem is the lack of agreement on the overall goals of the Tumen River development. The Tumen River Program has not gained very much interest in the US for several reasons. First, the location of the project is quite unusual. North Korea has expanded its economic zone hoping for promote investment, but without US participation, investment in the region is moving slowly. Second, US investors are not able to invest in the North Korean region according to US law. The restrictions not only limit US investors, but also the recent tensions with North Korea's nuclear weapons create tension and unstable environment for investment. Investors are more likely to invest in a worry-free area where they do not have to contend with the instability of the country. In Russia, while the Tumen River Program would be economically beneficial, many other diplomatic issues are demanding government leaders’ attention. Furthermore, Moscow is the main mecca for political activity, and Russia is not as active in the Tumen River area, so it has not gained much attention. According to Matthew Nimetz, former special counsel to the UN for the Tumen River Program, railways are currently being built, but the development is not heavily publicized. In short, the development projects of the Tumen River basin for Northeast Asian economies has been described as economically very attractive and yet extremely complicated politically. Until the region's political walls are broken down, the Tumen area seems destined to have a hard time luring capital and multilateral cooperation. The biggest barrier is North Korea and its intransigence regarding the nuclear issue and other agreements. Pyongyang claims to want foreign investment, but only on its terms. Only the South Koreans seem willing to pay the price, but the on-off relations between the two Koreas and the instability of the nuclear face-off have blocked investments for now.

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Outlook for North Korea: Development of Tumen River area and North Korea’s participation in this project means inflow of hard foreign currency, improvements in infrastructure and possible increase in its industrial capacity. North Korea, with its bleak economy, therefore, will continue to support the development of Tumen River area and most likely increase its future involvement in the project (more than likely via additional joint projects with China and Russia in short- and mid-term) as it seeks to break the economic isolation and hardship it has suffered since the collapse of most of its communist allies and the implementation of international sanctions.