[OUTLOOK]U.S.-China trade affects Korea

There are two very important and urgent international economic issues. One is how to deal with the instability in international economics caused by the trade deficit of the United States, and the other is how to respond to the rush to make free trade agreements among countries in the Pacific region. Both issues are crucial to Korea, as they will not only determine the stability and growth of the economy, but will also have great influence on the security environment of the region in the long term.
After all, the issues are really about how countries in the region will respond to China, the emerging power in the Pacific region, and to the United States, a traditional superpower trying to check the rise of China, and what role Korea should play under the circumstances. These issues are to be discussed at the 16th Pacific Economic Cooperation Council general meeting, which will be held in Seoul from Sept. 5 to 7.
This year’s trade deficit of the United States is estimated to reach $800 billion. As the deficit grew, the United States became the world’s largest debtor, with a net obligation of over $2.5 trillion. It’s only natural that confidence in the dollar would be shaken at this point. As a result, experts are concerned about the possibiilty of a sudden sell-off of U.S. dollars.
In that case, the shock to the East Asian economy, including the Korean economy ― not to mention the U.S. economy and the international capital market ― would be very serious. East Asian nations are in a special position regarding the international economic uncertainty over the U.S. dollar.
More than half of the U.S. trade deficit comes from trade with East Asian nations, namely China, Japan and Korea, and as a result of the consequent accumulation of a foreign exchange surplus, the U.S.’s East Asian trade partners currently hold more than $2.5 trillion in U.S. dollar reserves.
The direct cause of the surplus from trade with the United States is that each government is pursuing a currency policy that restricts the strengthening of its currency against the dollar. Therefore, Washington is saying that the East Asian nations are responsible for the uncertainty over the status of the dollar.
China in particular has accumulated an enormous trade surplus against the United States by pegging the exchange rate of the yuan to the dollar. As a result, trade disputes between the two countries have become very serious. While the United States is urging China to drastically revalue the yuan, Beijing has refused to raise the currency’s value. In response to Beijing’s rejection, the U.S. Congress is preparing the “Schumer amendment,” which would impose a uniform 27.5 percent retaliatory tariff on Chinese goods.
If the amendment is passed by the U.S. Congress and enforced, Beijing will have to respond in turn, and the series of actions will certainly make waves across East Asia, affecting Korea no less than China. Furthermore, the trade friction will make the region’s security environment much more unpredictable.
Korea, which has to maintain a very close partnership with both the United States and China, will find itself in a dilemma. In order to avoid such a situation, the United States, China and other East Asian nations must cooperate in their foreign exchange policies, and adjust their macroeconomic policies to support them. This is one of the most important challenges of the Pacific Economic Cooperation Council.
How will the trade order of the nations in the Pacific Rim unfold? As dozens of bilateral free trade agreements among the nations in the region knot countries together like strands of spaghetti, it is highly possible that two networks of free trade agreements centering around China and the United States will amplify the tension and friction between the two nations.
Of course, this would by no means be a desirable outcome, not only for Korea, but also for the region as a whole. The most desirable result would be the creation of a free trade regime in which all Pacific Rim countries take part. This is another key task for the council.
At the council’s general meeting, its member countries will focus on discussing the aforementioned challenges of the Pacific region. Moreover, Korea will present a plan on how it might work as a balancer among the three economic giants: the United States, China and Japan.

* The writer, a former ambassador to the Organization for Economic Cooperation and Development, is the president of the National Management Strategy Forum. Translation by the JoongAng Daily staff.

by Young Soo-gil