Korea cleared as a currency manipulator

Korea was let off the hook as a currency manipulator as part of the U.S. Treasury Department’s first foreign exchange policy report under U.S. President Donald Trump.

This is a huge turnaround from Trump’s rhetoric during his campaign last year where he raised the possibility of labeling Korea and other major trading partners including China, Japan and Germany as currency manipulators, which could have led to regulatory actions that would hamper imported goods from these countries.

However, Korea is not completely in the clear as it still meets two of the three requirements that could portray Asia’s fourth-largest economy as a manipulator with a trade surplus exceeding $20 billion.

The U.S. Treasury report released on Friday noted that while Korea still intervenes in its currency market and has a significant trade surplus, it gained notice for net selling $6.6 billion worth of foreign exchange, or 0.5 percent of the nation’s economy.

“This is in notable contrast to the several prior years of asymmetric intervention to resist won appreciation,” the report said. “In its last analysis of the won, the IMF [International Monetary Fund] maintained its assessment that the won is undervalued. This undervaluation supports the large current account surplus and reflects continued underperformance of Korean domestic demand.”

The report said the Korean government needs to enhance the flexibility of the exchange rate and the U.S. will continue to monitor the government’s intervention.

The recent change in mood has been detected since Trump met Chinese President Xi Jinping for the first time at Mar-A-Lago in Florida last week.

Trump, who claimed China was the grand champion of currency manipulation just two months ago, unexpectedly shifted gears, not only to say China is not a currency manipulator but he also said he had good chemistry with Xi.

Like Korea, China was not labeled a currency manipulator. However, the U.S. Treasury report noted that it will “scrutinize” China’s trade and currency intervention practices.

“China will need to demonstrate that it lacks of intervention to resist appreciation over the last three years represents a durable policy shift by letting the [renminbi] rise with market forces once appreciation resume.”

The Korean government worked hard to prevent the U.S. Treasury from branding it. The country’s Deputy Prime Minister of economics and Finance Minister Yoo Il-ho called his U.S. counterpart Steven Mnuchin on Thursday, the day before the report was released, to convince him that Korea is doing its best to reduce what the new Trump administration sees as a trade imbalance. This was the second call Yoo made to Mnuchin, who took office in February.

However, the Korean government continues to remain alert as it’s possible it may be elevated to manipulator status.

The U.S. government passed the Trade Facilitation and Trade Enforcement Act in February 2016 that labels a trading partner as a currency manipulator when meeting three requirements: having a trade surplus with the U.S. exceeding $20 billion; current account exceeding 3 percent of the country’s GDP and consistent intervention by the government of shoring up foreign currency worth minimum 2 percent of the country’s GDP for a year or longer.

Korea was placed on watch lists after meeting the first two requirements last year and is unlikely to be removed soon.

Korea’s trade surplus with the U.S. was $27.7 billion at the end of last year and the current account surplus is equivalent to 7 percent of the nation’s GDP. Although the surplus has declined compared to the end of 2015, when it was $30.2 billion and the current account was 7.9 percent of the country’s GDP, it still exceeds the threshold.

Korea’s current account relative to GDP was the fourth highest after Taiwan’s 13.4 percent, Switzerland’s 10.7 percent and Germany’s 8.3 percent.

Trump is expected to continue to pressure its trading partners, including Korea, to weaken the U.S. greenback. In a recent interview with the Wall Street Journal, Trump said the dollar remains strong. “That’s my fault because people have confidence in me,” Trump told the Wall Street Journal.

The next report by the U.S. Treasury will be in October.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]