By Kim Jae-kyoung

Exploiting Korea's Foreign Exchange Transaction Act could pave the way for the two Koreas to bolster economic cooperation, said Tony Michell, a Seoul-based specialist on the Korean Peninsula.

"In general this (foreign exchange act) retards the Korean economy and handcuffs the Korean financial industry, but in the case of North Korea it will help," Michell, a visiting professor at KDI School of Public Policy and Management, said in a recent interview.

Tony Michell

Michell explained the act will enable the South to make payments in won to the North without violating various sanctions on Pyongyang.

Since the act prohibits the offshore use of Korean won without permission from the Ministry of Strategy and Finance and the Bank of Korea, the won is difficult to use outside of South Korea.

From his perspective, the fact that South Korean won cannot be converted in normal offshore transactions protects the money from being used for military uses and may assist in allowing the U.N. to grant a waiver to reopen the Gaeseong Industrial Complex.

"Coincidentally under the present South Korean Constitution, all of North Korean territory is considered South Korean territory, so the use of the Korean won in the North is technically entirely legal and constitutional under the Korea Foreign Exchange Transaction Act."

Michell came to South Korea in 1978 and worked as a consultant for the World Bank, International Labour Organization and U.N. Development Program on Korean projects.

Michell stressed that by using the Foreign Exchange Transaction Act for any cooperative projects, the Kim regime will be subject to UNSC committee waivers, being paid in Korean won, not dollars.

"When the North Korean government wishes to use the money for trading or purchase of equipment, they will request payment via the Korean bank that holds the money, for example the Export-Import Bank of Korea," he said.

He said this method will enable monitoring of all uses the money is put to.

"If the North Koreans try to cheat, then the bills will turn up somewhere," he said. "There may be a small demand for Korean bills in China, but it is miniscule and the bills must be brought back to Seoul or be passed on."

His suggestion came as there have been growing calls for boosting inter-Korean economic cooperation following the historic summit between U.S. President Donald Trump and North Korean leader Kim Jong-un.

South Korea is eager to begin confidence-building measures such as re-opening the Gaeseong Industrial Complex that has been shut down by the previous Park Geun-hye administration in February 2016, after North Korea's series of missile and nuclear tests.

"The Gaeseong estate is a small example of trust-building and does not threaten the entire U.S. architecture of sanctions, especially if everything is paid in won which means the use of earnings must come through South Korea," he said.

However, various sanctions prevent South Korea's initiatives from becoming a reality. They are UNSC sanctions, some U.S. unilateral sanctions and Korea's sanctions related to the sinking of the warship Cheonan.

"Hardline sanction states, including the U.S., are concerned all these initiatives will require giving the North dollars which they might spend on more weapons, or at least which can relieve the pressure of sanctions," he said.

Even after the Singapore summit, Trump made it clear the U.S. will not relieve sanctions until the North completes denuclearization.

Michell, who is also president of Korea Associates Business Consulting (KABC), believes the Gaesong Industrial Complex, a symbol of cooperation between the two Koreas, should be the test case.

"When the North Korean workers get South Korean won as wages they will want to be able to buy South Korean products in the zone," he said.

This means the workers will use their South Korean wages to exchange for North Korean won at the free market rate, thus setting a market price for the conversion of South Korean won to North Korean won for the first time.

"Perhaps a joint venture bank between North and South could be established in Gaeseong in which the workers could place their savings and Gaeseong could become a free trade zone like Rason in the near future," he said.