What ‘win-win’?

Lee Sang-ryeol

* The author is the international news editor of the JoongAng Ilbo.

Trade protectionism from U.S. President Donald Trump’s administration was promised from the very beginning. So was a revision of the 2012 Korea-U.S. free trade agreement (FTA). In a summit last June with new South Korean President Moon Jae-in, Trump bluntly said that Washington would renegotiate the terms of the bilateral trade deal. Seoul cast doubts on his remarks. Koreans also thought Trump would not target its long-term ally in trade disputes, but that was wishful thinking.

After reaching an agreement on revisions to the six-year-old trade pact, Treasury Secretary Steven Mnuchin called it “a perfect win-win.” But no deal can benefit both parties. Calling the renegotiation a win-win is condescending words of comfort to the loser from the winning party. Timed with the settlement of the FTA, Seoul decided to disclose details of its foreign exchange transactions. Announcing the revised FTA, Washington declared that the two sides have agreed to ensure more transparency in currency policy to level the field in bilateral trade.

Although the move cannot be criticized as a breach of Korea’s sovereignty, Seoul authorities’ maneuvering room nevertheless will be impaired. As Korea’s authorities cannot interfere in currency markets as they want, the local currency has become easy prey to speculative forces.

Foreign exchange policy is a pivotal fiscal tool for an economy heavily reliant on external trade as Korea’s is. Individuals also pay close attention to the exchange rate as overseas travel has become commonplace. Korean exporters can no longer expect relief from the state in terms of currency policy. The question is whether Korea Inc. is ready to face the music. Some points should be made on the government’s concessions on the foreign exchange front.

The first is a lack of transparency and communication. Foreign media outlets were first to report that Seoul and Washington were engaged in talks to enhance transparency in Korean currency market engagements soon after the two sides wound up renegotiations on the FTA. The Moon administration claimed that discussion on the trade deal and foreign exchange were totally different. But experts were doubtful. They compared the government’s stance to separating the activities of ground troops and navy after a war has begun.

Second, our negotiating logic was too weak. The government tried to play down repercussions from the new agreement by claiming that South Korea is the only member in the Organization for Economic Cooperation and Development that does not disclose the details of state involvement in currency operation. But few other economies suffer massive capital flight like Korea whenever international markets shake. For instance, the Korean market had little involvement in the Wall Street-triggered financial meltdown in 2008. But the Korean won shot up to 1,500 won from the 1,000 won level against the U.S. dollar. As a result, authorities had to use $50 billion from our foreign exchange reserves to stabilize the currency. The job of defending a weak currency from speculative forces has gotten costlier.

Third, misconceptions of Korea’s economic condition is another worry. A number of officials in the liberal administration think the economy should reduce its reliance on exports and be led more by domestic demand. A stronger won helps cut import costs and thus stimulates domestic consumption, they argue. But such a naïve belief won’t work in our current economic conditions. A stronger won won’t likely hoist stubbornly sluggish consumption. Instead, it would give more reason for people to travel overseas and make use of the appreciated won.

The revised terms to the FTA and foreign exchange concessions add more challenges to a fragile economy. The Trump administration got its way, but Seoul played a weak defense. Its will and preparations against Washington’s offensives were too weak. Deputy Prime Minister for the Economy Kim Dong-yeon will be visiting Washington Thursday to meet with Mnuchin and International Monetary Fund Managing Director Christine Lagarde to fine-tune Seoul’s disclosure of foreign exchange engagements. The devil is in the detail. Kim must do his upmost to safeguard the national interests.

JoongAng Ilbo, April 16, Page 28