[OUTLOOK]The diplomacy behind currencyIt seems that President Roh Moo-hyun has finally decided to focus all his attention on saving the economy. This is a good idea.
The problem with the Korean economy, however, is that it is too highly dependent on overseas factors. This might have been inevitable in view of the fact that our country lacks natural resources. It is also because of our high dependency on other economies that we feel tension when there is a change in foreign exchange rates.
We have to react sensitively to the economic situation of our major trading partners. As we all know, the Korean won appreciated at a fast rate due to the sudden fall of the U.S. dollar. The U.S. dollar was at 1,190 won at the beginning of 2004 but fell to 1,050 won per dollar at the end of last year. As a result, the value of Korean won appreciated more than 11 percent.
The U.S. dollar’s slide seems to have slowed down a little in the beginning of the year. But considering that it actually reached its highest point at the beginning of February 2002 and then depreciated 27 percent, the U.S. dollar has fallen to a narrow range compared to the currencies of newly developed economies including Korea’s. Therefore, pressures to raise the value of the currency will be focused on countries of Northeast Asia in the future.
Especially, no objections can be made about the need to raise the Chinese yuan, which is pegged to the U.S. dollar. As long as this is the case, the weak dollar will not help reduce the current trade deficit of the United States. In such a case, the Chinese trade surplus with the U.S. will grow larger due to the rise in the value of the Korean won and other currencies. Korea and other Asian countries will be in a disadvantageous position for international competitiveness. It is obvious that China has to approach the foreign exchange issue with flexibility.
Despite this obvious situation, China is still insisting on its stiff position. Of course I am not denying that China has difficulties too. It is true that China has the problem of controlling its pace of development and straightening out its debt-ridden banks.
However, Beijing has to understand that cooperation is needed to keep international order, such as keeping a balanced foreign exchange rate. It will help China in the long run. In addition, international society has to convince China to show flexibility, as the United States is not in a position to “demand” China to raise the value of yuan. It is difficult for the United States to express its displeasure to the Chinese for not appreciating the yuan, because the United States wants China to continue buying bonds from the U.S. Treasury.
In order to persuade China, international society has to approach China with a logic that it must comply. Therefore multilateral negotiations may be more effective than bilateral ones. Under this presumption, six-way talks to handle the foreign exchange rate problem are worth thinking about. It is my opinion that if the foreign exchange rate problem is dealt with in a conference where the United States, China, Japan, the EU, Russia and Korea take part, it would be possible to come up with a solution to the problem without emotional intervention and rather than having two-way talks with China.
Nonetheless, in order to have multilateral negotiations on the adjustment of exchange rates, there has to be a series of agreements between the two major countries first, so that an international consensus can be made just like the 1985 Plaza Agreement. Fortunately, Korea can consider using the APEC summit meeting which is to be held here this autumn as part of this process. Actually, there is no need to wait till November.
The foreign exchange problem should be on the agenda of the Foreign Ministers’ meeting set for September. Although the Plaza Agreement cannot be repeated, there is nothing much different in that the foreign exchange problem could also be solved through a multilateral approach.
The point is that we have to understand that the foreign exchange issue is a very important matter to us, and that we have to actively spread a persuasive logic in international society. The problem with our diplomacy is that, perhaps because of our cultural tradition, we have a tendency of keeping quiet and conceding even important profits to others to avoid conflicts or fights.
It is desirable to be more active and aggressive diplomatically when it is necessary for a just and necessary profit for us. I believe it is time to really carry out diplomacy that speaks up when needed.
* The writer, a former ambassador to the United States, is a professor emeritus at Korea University. Translation by the JoongAng Daily staff.
by Kim Kyung-won