By Jon Herskovitz
SEOUL (Reuters) - North and South Korea squared off over Seoul's plans to crack down on Pyongyang's suspected illicit arms trade at rare and acrimonious talks on their one remaining major area of economic cooperation, an official said.
North Korea added to tension on the heavily armed peninsula a day after the talks by accusing the South of moving a border marker several dozen metres, saying on Wednesday the move "is a vicious criminal act" that could lead to a military response.
Russia's foreign minister was due to arrive in Pyongyang on Thursday in a bid to reduce tensions raised by the North's defiant launch of a long-range rocket this month, its threat to boycott nuclear disarmament talks and plans to restart a plant that makes bomb-grade plutonium.
The rival Koreas held their first economic talks in more than a year on Tuesday at the Kaesong Industrial Park, where South Korean firms use cheap North Korean labour and land to make goods at the complex located just north of their border.
North Korea said it wanted to revise the terms of operation to increase the wages for its workers, whose basic minimum monthly salary of $70 is paid to the North Korean state, and renegotiate land lease terms.
Analysts said the North may be looking to squeeze more money out of Kaesong after it lost aid from the South equal to about 5 percent of its yearly GDP due to political wrangling.
It also stands to feel a greater pinch on its finances after the United Nations approved a call to tighten existing sanctions on the reclusive state to punish Pyongyang for its April 5 launch, widely seen as a disguised test of a long-range missile.
"The flow of aid from the South has stopped. Now it has fewer incentives to keep the unfavourable terms (at Kaesong) intact amid the souring inter-Korean relations," said Koh Yu-hwan, a professor of North Korea studies at Dongguk University.
ARMS TRADE
South Korea could cut down on another source of hard currency for its cash-strapped neighbour if it joins a U.S. plan, called the Proliferation Security Initiative (PSI), to halt the flow of weapons of mass destruction.
The South's delegation at the talks in Kaesong called on the North to refrain from criticising Seoul's participation, after Pyongyang had said it saw joining PSI as a declaration of war, a South Korean Unification Ministry spokesman said.
The North's delegates warned the South not to join PSI, the South's Yonhap news agency reported an informed source as saying. Yonhap also said South Korea may announce its decision to take part in the initiative this weekend.
South Korea for years had avoided joining PSI out of fear of antagonising the prickly North but government officials said Seoul was moving closer after Pyongyang raised regional tension with the launch and its nuclear threats.
North Korea, angered by South Korean President Lee Myung-bak's decision after he took office a year ago to cut the aid flow to his impoverished neighbour, has disrupted work at the Kaesong enclave to put pressure on Seoul to drop its hard line.
But due to Kaesong's low costs the number of South Korean companies operating there has increased steadily since its first goods were produced in 2004. As of the end of February 2009, there were 93 firms at Kaesong employing nearly 39,000 North Korean workers, the Unification Ministry said.
Few analysts expect Pyongyang to actually shut down the park because it would harm its already tarnished reputation as an international business partner, lead to the loss of a steady stream of income and force the North to find jobs for tens of thousands of its displaced workers.
But several companies at the plant are worried.
"It is wrong and problematic that North Korea made requests to change terms of our contract," said an official with a firm at Kaesong who asked not to be named.
"Now, we could lose those 'merits' which were the incentives for our investment in the first place."
(Additional reporting by Kim Junghyun; Editing by Jerry Norton)
