[Viewpoint] What’s needed is a ‘COEX Accord’

President Ronald Reagan’s economic policy - Reaganomics - in the 1980s can be defined by sharp tax cuts and aggressive defense spending that generated a catastrophic federal deficit. To cover the snowballing deficits, the government borrowed heavily from home and abroad by issuing long-term high-yield Treasuries.

A worldwide purchasing spree on U.S. debt sent the dollar skyrocketing, making U.S. exports expensive and resulting in heavy trade deficits. The government had to grapple with double deficits in the federal and trade balance. It took strong action to restore the credibility of the greenback and the U.S. economy.

Republican James A. Baker took charge of the Treasury Department and orchestrated a carefully arranged symphony on currency intervention. The finance ministers of five nations - the U.S., Japan, Britain, France and Germany - gathered on Sept. 22, 1985, to sign the “Plaza Accord,” named after New York City’s Plaza Hotel, where the meeting occurred.

As a result of the agreement to devalue the dollar against its Japanese and Germany counterparts, the dollar, which hovered at 240 yen, tumbled to 120 yen in just three years. When applied to the won, it would mean the dollar’s value cutting itself in half from 1200 won to 600 won, which can wipe out many of our exporters. The U.S.’ deficit situation got better, but the sharp appreciation in the currency led to an asset price bubble and a deep recession that has plagued Japan even to this day.

To us, the Plaza agreement was a windfall. Consumers in major markets began to prefer cheaper Korean products over Japanese counterparts and created a boon for made-in-Korea goods. Our trade balance began to show black figures for the first time ever and Korea’s per capita income jumped to $5,000 by 1989 from $2000 in 1986, and again doubling to $10,000 by 1995. We heartily enjoyed the free ride.

Twenty-five years later, the global economy is swept up by new turmoil triggered by a currency dispute between key economic powerhouses. The U.S. still remains at the deficit end, but China has replaced Japan in the surplus end. The U.S. incurred massive trade deficits until the mid-2000s and the deficits settled in dollars teemed over to other markets. China’s annual trade surplus against the U.S. tops $200 billion and its foreign-exchange reserve coffers swell with more than $2.5 trillion.

U.S. hegemony lost ground with the economy dogged by massive deficits and blamed for wreaking havoc on the global economy. There no longer is comfort in the economic notion that the U.S. economy is secure as long as dollars flow back to the local economy when other economies buy U.S. Treasuries with the dollars they earned. The global imbalance has taken a toll on the U.S. economy.

The U.S. is now revisiting the Plaza Accord in relation to China. It wants international coordination to appreciate the Chinese yuan to solve its deficit problem as it did with the Japanese. For similar impact, the dollar should be devalued to a 4-yuan level from the current 6.7 yuan. But China is not Japan. Tokyo couldn’t say no to the U.S. Beijing can and will.

World leaders will gather for the G-20 Summit next month in Seoul amid a warlike tension over worldwide currency policies to buttress their economies. But the Seoul meeting could be an opportunity for Korea. The Korean leadership must at least orchestrate a nonbinding agreement on setting guidelines for currency policy toward a common goal of lasting balanced growth.

Drawing up an international agreement on the currency issue should be added to the Seoul Initiative, along with other agenda items such as the creation of a financial safety net. France, next year’s host country, already put the currency crisis on its agenda. We cannot put off the issue until next year.

We have little time left. The Seoul meeting can turn into a monumental event if it succeeds in drawing up a Plaza-like agreement on a currency solution at COEX. If the Plaza Accord serves as a catalyst for Korean economic progress, the Seoul Initiative, or COEX Accord, can be the basis for a quantum leap in the Korean national brand.

*The writer is a professor of business administration at the University of Seoul. Translation by the JoongAng Daily staff.

By Yun Chang-hyun