North Korea followed through on its Oct. 3 commitment to disable its nuclear facilities this quarter, but resisted giving an “complete and correct” declaration of its nuclear programs.  While the disabling actions – which would prevent North Korea from producing nuclear material for at least a year – encouraged U.S. officials, Pyongyang’s unwillingness to declare its uranium enrichment program, in particular, created a potentially major obstacle in the Six-Party Talks. At the end of the quarter, the U.S. faced a diplomatic dilemma: how to incentivize Pyongyang to continue the disabling process, while pressuring North Korea to come clean on its past nuclear activities.  Pyongyang insisted it had engaged in “sufficient consultation” with the U.S. on the declaration and threatened to slow down the disabling process until it received more compensation.

The election of South Korea’s conservative party candidate, Lee Myung-bak, on Dec. 19 signified that Seoul and Washington will soon likely have a more coordinated policy approach toward North Korea.  Lee stressed that he would adopt a “pragmatic” approach and support large-scale South Korean economic assistance to Pyongyang – but only if North Korea first abandons its nuclear program. U.S. and South Korean officials sparred this quarter over Korea’s decision to suspend U.S. beef shipments because of the threat of mad cow disease.  They proved unable to resolve this issue, although President Roh Moo-hyun and President-elect Lee pledged to work together to ratify the U.S.-Korea Free Trade Agreement (FTA) at the upcoming session of the National Assembly in February.

In an historic breakthrough at the Six-Party Talks, North Korea committed to disabling its Yongbyon nuclear facilities and declaring all its nuclear programs by Dec. 31, 2007. It also pledged not to transfer nuclear materials, technology, or know-how.  In exchange, the U.S. agreed to move toward normalizing relations with Pyongyang by fulfilling its commitment to take North Korea off the list of state sponsors of terrorism and end the application of the U.S. Trading with the Enemy Act as Pyongyang fulfills its denuclearization commitments.

North Korea’s agreement in the nuclear negotiations created a positive atmosphere for a successful North-South summit, held Oct. 3-4 in Pyongyang.  In their summit declaration, signed by President Roh Moo-hyun and Chairman Kim Jong-il, the two Koreas pledged to work together on security, economic and humanitarian issues while making only passing reference to smoothly implementing the Six-Party Talks agreement. Significantly, the declaration also explicitly acknowledged that “the South and the North both recognize the need to end the current armistice regime and build a permanent peace regime.” According to U.S. Ambassador to South Korea Alexander Vershbow, Washington and Seoul “have already begun consultations…in order to develop a common approach” to this issue.

As the ratification process for the Korea-U.S. Free Trade Agreement (FTA) moved ahead, Seoul resumed imports and inspections of U.S. beef.  South Korea seemed to take seriously the warning of U.S. Secretary of Agriculture Mike Johanns that the Congress would not ratify the FTA as long as restrictions on U.S. beef remain in effect.  In early September, the South Korean government submitted the FTA to the National Assembly for ratification.

Finally, in a change long sought by South Korea, President Bush signed into law in early August a measure that will allow South Koreans to visit the U.S. without a visa, for a period of up to 90 days.  The change is set to go into effect in July 2008, at the time the Korean government is expected to issue biometric “e-passports” to its citizens.

Despite the progress made on several fronts, there was also an undercurrent of tension that marked the relationship between both Koreas and the U.S. throughout the quarter. Nevertheless, each time the tension bubbled to the surface both sides seemed intent on smoothing over the differences and moving on with the issue at hand.

North Korea promised to shut down and seal its nuclear facilities at Yongbyon this quarter in a deal that implements the Six-Party Talks September 2005 Joint Statement, committing Pyongyang to dismantling its nuclear weapons program. To achieve this breakthrough, the Bush administration agreed to transfer back to North Korea approximately $25 million in funds that were frozen since the fall of 2005 in a Macau bank for reported laundering of U.S. money.

Despite the political will on both sides, however, “technical issues” involving financial regulations prevented the funds from being transferred, as scheduled, by the mid-March round of Six-Party Talks, which was quickly adjourned. At the end of the quarter, U.S. diplomats expected to resolve the banking issues shortly so North Korea would move to shut down its reactor and allow inspectors from the International Atomic Energy Agency (IAEA) to reenter the country.

The U.S. and South Korea reached an historic free trade agreement (FTA) at the end of the quarter, which must now go to the U.S. Congress and South Korean National Assembly for ratification. The agreement would eliminate more than 90 percent of the tariffs currently applied in the two countries’ international trade. Reportedly, a “rice for beef” deal clinched the FTA. South Korea agreed to lift completely restrictions on U.S. beef that aim at preventing the spread of mad cow disease. In return, U.S. negotiators agreed to exclude rice from the FTA, effectively giving into demands from Korean rice farmers who had angrily demonstrated against the accord.

Senior U.S. and South Korean defense officials reached a tentative agreement in March on the timetable and funding to relocate U.S. forces in South Korea to a newly expanded base at Pyongtaek, south of Seoul. South Korea agreed to pay $6 billion of the $11 billion project and promised that base construction would be completed no later than 2012.

Concerted efforts by the U.S., China, South Korea, and Russia in mid-June finally overcame “technical problems” and led to the return of approximately $25 million in frozen funds to North Korea. After helping to break this logjam, U.S. chief envoy to the Six-Party Talks Christopher Hill traveled to Pyongyang for meetings with the DPRK foreign minister and chief delegate to the Six-Party Talks.

Hill strived to accelerate North Korea’s compliance with the Feb. 13, 2007 joint agreement by urging Pyongyang to quickly accept inspectors from the International Atomic Energy Agency (IAEA), shut down its nuclear facilities, and participate in a new round of nuclear negotiations in July. Hill’s meetings were the highest level of U.S. bilateral contacts with North Korea’s regime since October 2002.

The U.S. and South Korea signed the free trade agreement (FTA) at the end of the quarter, just one day before President Bush’s “fast track” authority to negotiate trade agreements expired. Despite the positive notes struck by U.S. and Korean trade officials, however, Democratic Congressional leaders immediately announced they would oppose the FTA because it adversely affected U.S. auto manufacturers and workers. Democrats, who control Congress following the 2006 mid-term elections, are likely to block ratification of the FTA unless the Bush administration undertakes a strong lobbying effort in the coming months.

North Korea made good on its long-time threat to conduct a nuclear test when it exploded a small nuclear device of less than a kiloton on Oct. 9. The test generated political shock waves and led to comprehensive sanctions imposed by the UN Security Council Oct. 14. Under tremendous pressure from the international community and China, in particular, North Korea announced Oct. 31 it would return to the Six-Party Talks.

When the talks reconvened in Beijing on Dec. 18, they made little progress other than reaffirming the main accomplishment of these negotiations to date – the Sept. 19, 2005 joint statement in which North Korea agreed to abandon its nuclear program in exchange for security, political, and economic benefits. Given North Korea’s nuclear test, the real surprise this quarter was that a new round of nuclear negotiations occurred at all.

In their ongoing negotiations on a free trade agreement (FTA), the U.S. and South Korea ran into difficulty on issues including autos, pharmaceuticals, antidumping measures, and beef. At the end of the quarter, Korean negotiators were reportedly considering whether to propose a “big deal” that would resolve outstanding differences on major issues. Both the U.S. and Korean negotiating teams are aware that they must wrap up an agreement by March 31 and give Congress 90 days for review before President Bush’s “fast-track trade promotion authority” (TPA) expires June 30, 2007.

The U.S. and South Korea agreed in late October to transfer wartime operational control of Korean troops to South Korea between Oct. 15, 2009 and March 15, 2012. The precise time of transfer along with detailed implementing arrangements will be decided in joint consultations during the first six months of 2007. The U.S. will continue to provide significant air and naval “bridging capabilities” as well as intelligence, surveillance, and reconnaissance until South Korea acquires sufficient capabilities of its own in these areas.

South Korea notified the U.S. in early December that it would extend the deployment of its troops supporting U.S.-led coalition forces in Iraq for another year, although at a reduced level. South Korea’s “Zaytun Division” has contributed humanitarian and reconstruction assistance since 2004 in the northern Iraqi city of Irbil. Korean commandos have also provided security for the UN Assistance Mission for Iraq.

North Korea elevated the 11-month impasse in the Six-Party Talks to a diplomatic crisis in early October by conducting a test of a small nuclear device. The U.S. responded by calling for the United Nations Security Council (UNSC) to impose harsh sanctions on North Korea “unlike anything that they have faced before.” President George W. Bush explicitly drew a diplomatic red-line that the United States would regard Pyongyang’s “transfer of nuclear weapons or material” to other states or terrorist groups as a “grave threat” that would impliedly bring a U.S. military response.

North Korea’s nuclear test Oct. 9 followed a unanimous statement of the UNSC on Oct. 6 that a nuclear test would “jeopardize peace, stability, and security in the region and beyond.”

In an earlier unanimous resolution, the Security Council condemned North Korea in mid-July for test launching seven missiles and imposed a set of missile-related sanctions on Pyongyang.  Instead of vetoing this measure, as Pyongyang undoubtedly expected, China delivered a major diplomatic shock to North Korea by voting to approve the resolution, which called on UN member countries to prevent transfers of missile technologies and “financial resources” to Pyongyang. For the moment, Washington, Seoul, and Beijing seemed to be speaking with one voice.

At the mid-September summit meeting of President Bush and ROK President Roh Moo-hyun, the two presidents indicated they would follow a “common and broad approach” to the North Korean nuclear issue. President Bush gave his blessing to President Roh’s request for returning operational command of South Korea’s forces during wartime to Seoul. Bush defused opposition to this proposal from South Korean conservatives by promising that U.S. forces would come to South Korea’s aid in an emergency and continue to play an important military support role on the Korean Peninsula.

In two rounds of negotiations this quarter on a U.S.-Korea Free Trade Agreement, U.S. and South Korean trade negotiators put on the table a number of critical issues in manufacturing, services, and agriculture but were only able to reach an apparent agreement on pharmaceuticals. In South Korea, the government is under popular pressure from farmers, labor unions, and business organizations to resist any excessive U.S. demands for opening the Korean market.

After the impasse in the Six-Party Talks deepened this quarter, North Korea shocked its neighbors as well as the United States by launching seven missiles July 4 into the Sea of Japan.  One of these missiles was a long-range Taepodong 2 that theoretically might have reached the U.S., but failed, 40 seconds into its flight.

The missile tests fed a widespread perception in the U.S. that North Korea’s action represented a political failure for the Bush administration. U.S. financial and diplomatic pressures over the previous 10 months had neither contained Pyongyang nor caused it to submit to U.S. political demands.  Together with the U.S. refusal to offer any positive gesture toward North Korea, these pressures merely formed the backdrop to North Korea’s all too familiar defiance of the outside world.

The U.S. and South Korea held their opening round of negotiations on a Korea-U.S. free trade agreement (FTA) during early June. Among the most contentious issues were the U.S. demand to open the South Korean rice market to U.S. exports, and South Korea’s demand that the U.S. extend favorable tariff treatment, under the FTA, to all products produced in the Gaeseong Industrial Zone in North Korea. On the rice issue, South Korean negotiators gave no ground and are under considerable pressure from farmers not to allow U.S. rice into the country.  On the Gaeseong issue, U.S. negotiators rejected the Korean request, claiming that North Korean workers at the site are subject to harsh, exploitative treatment by the Pyongyang regime.

Finally, at a meeting in Singapore, South Korea’s defense minister and the U.S. secretary of defense appeared to reach general agreement that operational control of South Korea’s armed forces during wartime would be transferred back to South Korea after five or six years. The final agreement will be announced at the ROK-U.S. Security Consultative

In fits and starts, North Korea and the U.S. sought procedural common ground this quarter for resuming the Six-Party Talks on North Korea’s nuclear program. The deputy head of Pyongyang’s delegation, Ri Gun, traveled to New York in early March for a “working-level” meeting to discuss U.S. financial sanctions for North Korea’s alleged counterfeiting of U.S. dollars.

The substantive positions of the two sides remained the same after the meeting:  Pyongyang said it would continue to boycott the nuclear talks until Washington lifted the financial sanctions; Washington argued the sanctions were a purely “law enforcement measure” not linked to the nuclear issue.  In mid-March, however, U.S. Ambassador to South Korea Alexander Vershbow proposed that discussions on the financial issue could continue bilaterally at the Six-Party Talks. At quarter’s end, North Korea had not yet responded to this proposal.

In early February, the U.S. and South Korea announced the beginning of negotiations on a Free Trade Agreement (FTA) that U.S. Trade Representative (USTR) Rob Portman called the “most commercially significant free trade negotiations we have embarked on in 15 years.” Not to be outdone, South Korean Trade Minister Kim Hyun-Chong said the initiation of FTA negotiations “is the most important event [in U.S.-Korea relations] since the signing of the military alliance in 1953.” The first round of official talks is scheduled to begin in early June, following several procedural meetings.

The U.S. and South Korea held their first “Strategic Consultation for Allied Partnership” (SCAP) this quarter, not long after Presidents George W. Bush and Roh Moo-hyun agreed to initiate these talks at their summit meeting in November. During the consultation, the two governments reached a general agreement that the U.S. could exercise “strategic flexibility” and use its forces stationed in South Korea to meet military contingencies outside the Korean Peninsula.

Late in the quarter, the U.S. and South Korea also agreed to form a joint panel to consider the modalities of transferring wartime command of South Korean armed forces to the government of South Korea.  At present, the commander of U.S. forces in South Korea would exercise operational control over the armed forces of South Korea, through the Combined Forces Command, during wartime.

The Six-Party Talks on North Korea’s nuclear program suffered a major reversal this quarter as Washington and Pyongyang unleashed verbal attacks on each other over activities outside the scope of the negotiations – counterfeiting U.S. dollars, drug trafficking, and Pyongyang’s dismal human rights record. North Korea said it would boycott the talks until it obtained a high-level meeting with U.S. officials to discuss financial sanctions related to North Korea’s alleged counterfeiting.

Factions in the Bush administration that oppose the Six-Party Talks or seek to rein in Ambassador Christopher Hill (who achieved the September agreement to eliminate North Korea’s nuclear program) escalated U.S. rhetoric to a high pitch in early December. After U.S. Ambassador to South Korea Alexander Vershbow termed North Korea a “criminal regime,” Pyongyang fired back that his remarks constituted “a provocative declaration of war on our people.”

By the end of the quarter, it appeared that the apparent disarray within the U.S. government over policy toward North Korea had seriously undercut the ability of U.S. negotiators to reach a diplomatic resolution of the nuclear issue. It was not clear whether or when a new round of the Six-Party Talks could be scheduled.

South Korea’s Defense Ministry sought National Assembly approval in December for its plan to cut the number of South Korean forces in Iraq by 1,000 – approximately one-third of the contingent of 3,250 troops South Korea has sent to Iraq to support the U.S.-led coalition. Although the U.S. protested this decision, South Korea’s defense minister justified it by citing the success of the Oct. 15 referendum in Iraq, which laid the basis for adopting a new national constitution.

On economic and trade matters, Presidents Roh Moo-hyun and George W. Bush, at their meeting in mid-November in Gyeongju before the APEC summit in Busan, agreed to put a U.S.-South Korea free trade agreement (FTA) on a fast track, with negotiations beginning this spring. Their decision reflected the desire of both governments to strengthen U.S.-South Korea relations at a time when differences over strategy toward North Korea have caused major strains in the alliance.

For the first time in more than two years, diplomats at the Six-Party Talks made significant progress this quarter on the nuclear issue with North Korea. In a joint statement of principles, Pyongyang committed itself to “abandoning all nuclear weapons and existing nuclear programs and returning at an early date to the treaty on the nonproliferation of nuclear weapons and to International Atomic Energy Agency (IAEA) safeguards.”

In return, North Korea received security assurances, a U.S. and Japanese promise to take steps toward normalization of relations, a South Korean offer of 2 million kilowatts of electricity, and a commitment to implement the agreement sequentially on a reciprocal basis. In the Chinese-brokered joint statement, the United States and North Korea further agreed to discuss Pyongyang’s right to develop peaceful nuclear energy and its demand for light-water reactors at a future meeting.

Importantly, the agreement also gave impetus to negotiating a permanent peace regime for the Korean Peninsula and establishing a system for multilateral security cooperation in Northeast Asia.  The parties decided to conduct another round of the Six-Party Talks in November 2005 to discuss detailed arrangements for verifying and implementing the joint statement.

Their successful meeting came after more than a year-long impasse in the talks. North Korea agreed to resume the negotiations July 9, following a meeting in Beijing where the U.S. envoy to the Six-Party Talks, Ambassador Christopher Hill, conveyed several desired assurances to Pyongyang.

Despite political pressure that arose after the London terrorist bombings in July to withdraw South Korean forces from Iraq, South Korea appeared to lay the groundwork this quarter to extend its troop deployment into 2006.  Without an extension, the National Assembly’s mandate for the forces in Iraq will expire at the end of November.

U.S. Trade Representative Rob Portman announced in early September that the U.S. would decide by the end of the year whether to launch a negotiation for a U.S.-South Korea Free Trade Agreement.  He said Washington’s decision would hinge on Seoul’s willingness to resolve several outstanding trade issues, including South Korea’s “screen quota” on showings of Hollywood movies and its import ban on U.S. beef.  At the end of the quarter, South Korea was reportedly reassessing its refusal to meet U.S. demands on those issues.