[FORUM]Economic ‘bullets’ can’t be avoidedSmall and weak countries often encounter a sad situation. When it comes to economic problems, they never avoid being hit by stray bullets whenever there are trade wars between the strong powers. As the trade frictions between the United States and Japan intensified due to the expanding U.S. trade deficit in the 1980s, tremendous trade pressure was put on Korea as well.
In the spring of 1989, Han Seung-soo, then minister of commerce and industry, explained this situation at a luncheon at the Institute for International Economics in Washington, D.C., quoting a Korean proverb, “When two whales fight, the back of a shrimp between them hurts.” Fred Bergsten, the institute’s director, partially agreed with him, saying that there is also an American proverb that “When two elephants make love, it is the grass beneath them that suffers.”
But Korea could narrowly avoid the retaliatory measure of being designated as a priority foreign country only after yielding substantially to the request of the United States.
Because of the recent war of nerves between the United States and China over exchange rates, the financial markets of the surrounding countries have been fluctuating. With its annual trade deficit exceeding $500 billion and concerned about next year's election, the United States has demanded the appreciation of the Chinese currency. Armed with retaliatory tariffs, the U.S. Congress as well as the Bush administration has pressed China hard. But China, which has pegged its currency to the U.S. dollar, maintains the position that it will not succumb to the U.S. demand.
In contrast to Japan, which had to agree to the appreciation of the yen under the 1985 Plaza agreement, China claims it is not in a position to accept such a demand. China does not want to follow the path of its neighbors, which faced a financial crisis while maintaining stong currencies. It has also noted that while it has a considerable surplus in trade with the United States, it still posts trade deficits with Korea and other countries, so that its overall trade surplus is not that large.
As a consequence of China’s firm stance against appreciation, other countries are being hit by stray bullets. The exchange rates strengthened and stock markets tumbled in major Asian countries, except China, early last week. The Korean won appreciated 16 won against the U.S. dollar and the Korea Composite Stock Price Index fell 33 points in one day.
Amid this complicated situation, one noteworthy thing is the remarks of Mr. Bergsten, who attended a meeting with representatives of the business community from Korea and the United States last week. He is reported to have argued that it would be desirable if China’s currency appreciated 25 percent and the Korean won by 10 percent.
Government authorities seem to be trying to ignore his remarks, saying that because he expressed his personal opinion as a scholar in a private meeting his view cannot be accepted as the opinion of the U. S. government.
But considering his and his institute’s influence on the formulation of U.S. foreign and economic policies, and recalling that his prophetic statements have come true in the past, we should not take his remarks lightly. When he came to Korea in July 1986 at the invitation of the Korea Institute for Industrial Economics and Trade, he put his hosts in an awkward position by predicting the drastic appreciation of the Korean won by 15 to 20 percent. Many people half-believed him but since then the value of the won has appreciated as much as 25 percent against the dollar.
At present, an appreciation of 10 percent is an unreasonable demand. Not only is the Korean economy in difficulty, but the country’s current account surplus has sharply declined. Also, compared to other Asian currencies, the Korean won, which has been under the floating exchange rate system, has been upwardly valued steadfastly.
Therefore, I’d like to ask the government to try its best to stop an additional appreciation. But it would be better for companies not to pin their hopes on our government’s efforts. However strong the cause or efforts against the appreciation might be, we can hardly escape the position of the shrimp or the grass. The best choice would be to prepare to endure an appreciation of the won of 10 percent or more. While seeking ways to manage the risk in preparation for changes in the exchange rate and to take advantage of the benefits of an appreciation of the won, we should strengthen our efforts to improve quality, reduce cost and enhance productivity in preparation for a possible decline in price competitiveness.
* The writer is the director of the JoongAng Ilbo Economic Research Institute.
by Ro Sung-tae