Currency war on horizon

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Currency war on horizon

The United States House of Representatives finally passed a bill that allows the Commerce Department to impose tariff penalties on countries that deliberately undervalue their currency. While falling short of explicitly naming China, the legislation apparently targets the industrial powerhouse, which the U.S. blames for its trade deficit.

The two countries are moving quickly toward an all-out clash. Beijing slapped anti-dumping tariffs on American poultry imports, and Washington retaliated by imposing punitive tariffs on Chinese copper pipes. They are waging a war on two of the most sensitive economic areas - currency and protectionist trade.

The U.S. economy has suffered from a chronic trade deficit for some time. Half of the deficit comes from trade with China. As a result, the House fired a loud and clear warning shot, with Speaker Nancy Pelosi angrily calling for action to fix the widening trade gap with China.

China apparently doesn’t want to back down. It let the yuan fall by 0.11 percent upon news about the bill passed by the House. Its commerce department even issued a statement that the U.S. would be violating World Trade Organization regulations by raising tariffs over its currency policy. China, whose rapid rise in economic status has been largely driven by brisk exports, believes it will lose growth momentum if it lets its currency rise too fast. China has seen how Japan has suffered economically after it bowed to international pressure and agreed to a revaluation of the yen after the Plaza Accord in 1985.

Unfortunately, the South Korean market may be a victim of the escalating trade tension between the two countries. Investors are already flocking to the local bourse, betting the won will rise in sync with the yuan. Economists worry that a strong won could hurt exports. Investors are parking their cash in Korean equities, hoping to pocket profits from the rising won. Foreigners bought more than 4 trillion won ($3.5 billion) worth of stocks in September, pushing the won to 1,140 against the dollar. The Chinese are buying Korean bonds and fanning the won’s rise.

The global demand for semiconductors and liquid crystal displays - our mainstay export items - is ebbing. Coupled with the won’s strengthening, our exports will receive a double whammy.

Authorities cannot easily interfere to slow the won’s rise because of Korea’s role as the host of the November G-20 Summit. We need a delicate and thorough contingency plan against a global currency war. We must use the G-20 podium to de-escalate protective trade practices and currency manipulation. It’s the only way to save the world economy as well as our own from a catastrophic fallout.
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