South Korean officials are meeting their U.S. counterparts to discuss a free trade deal this week, but they can hardly win a U.S. concession to recognize items manufactured at the complex in the North Korean border city of Kaesong as South Korean products.

If the Kaesong products are not considered as South Korean-made, which ensures tariff benefits, they can hardly be sold in the United States and elsewhere, analysts say.

Still worse, South Korean manufacturers will be reluctant to make ventures in the North Korean industrial complex at a time when tensions are running high across the border following the North's missile tests last week.

The Kaesong Industrial Complex, located just north of the heavily fortified border, is considered to be one of the main achievements of the landmark inter-Korean summit in 2000. The zone is a testing ground for mixing South Korean capitalism and technology with the North's cheap labor.

A total of 15 South Korean companies produce goods ranging from clothes to kitchenware at the complex, hiring thousands of North Korean workers.

During the first round of negotiations for a free trade agreement held in Washington last month that ensures tariff benefits for South Korean goods shipped to the United States, Seoul officials strongly called for the United States to recognize items produced in the Kaesong complex as South Korean goods.

As the United States dismissed the demand, saying a bilateral free trade pact will only apply for products made in South Korea, noting that Kaesong is in the North Korean territory, South Korean officials have hoped to use the next round of talks to win a U.S. concession.

But the North's test-launch of missiles have made the Bush administration more hawkish and stubborn. The United States has been put alert as the Taepodong-2 missile which could be equipped with a nuclear warhead may be capable of reaching the continental United States.

At the end of the first-day of the second round of FTA talks that began on Monday, South Korean officials said they have almost dropped the demand on the Kaesong products.

"It is almost impossible to win a U.S. concession following the missile tests," a government official said speaking on condition of anonymity. "We will focus out efforts on the other key agenda in the remaining negotiations," he said.

Analysts say U.S. officials are concerned that the Kaesong project, much of the wages might go into the pockets of North Korea's ruling elite possibly to develop ballistic missiles, nuclear arsenal and other weapons of mass destruction.

More than 6,500 North Korean workers are working for a dozen South Korean firms operating in the joint complex. Under an inter-Korean government accord, North Korean workers there are paid about $58 a month. The money is not paid directly to the workers, but instead goes to the North Korean authorities.

South Korea's defense officials estimate the North spent more than $30 million to test-fire seven missiles on July 5.

Shortly after the missile launches, Jay Lefkowitz, the U.S. envoy on North Korean human rights, delayed his scheduled trip to the site of an inter-Korean economic project in Kaesong.

The trip by Lefkowitz, which was originally scheduled for mid-July, was expected to provide new momentum for direct dialogue between Pyongyang and Washington since the U.S. human rights envoy has been one of the harshest critics of the North's communist regime.

If the United States does not recognize Kaesong products as South Korean-made items, the inter-Korean projects can hardly survive, analysts say.

South Korean manufacturers have relocated their factories to the Kaesong complex to benefit from cheap labor and land, want to export goods at competitive prices to the United States and other countries.

With the labels of being "made in DPRK (North Korea)," however, Kaesong products can hardly be sold in the United States due to high tariffs that would cut their price competitiveness.

The United States is concerned that "strategic products," such as precision machinery and high-tech personal computers, may reach the industrial park in the North, which the United States views as supporting terrorism. The U.S. State Department has already conveyed its concerns about Seoul's easy shipments of strategic items through the Kaesong project.

The United States has long blacklisted North Korea, a country that sponsors terrorism. It has imposed financial sanctions on the North for its alleged counterfeiting, money-laundering and other financial illegalities.

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