No time for relief

The Department of the Treasury has put South Korea — along with China, Japan, Taiwan and Germany — on its “monitoring list” for foreign exchange policies. The Treasury’s decision last weekend stopped short of designating Korea a country eligible for enhanced analysis. Our government may feel relieved at the action.

Once put on the list for enhanced analysis, U.S. trading partners face strong economic sanctions. In addition, the U.S. government can not only restrict U.S. businesses’ investments and prohibit its trading partners from entering huge procurement markets in the United States, but also put financial pressure on them through the International Monetary Fund — all thanks to the Bennet-Hatch-Carper Amendment to the customs bill, which went into effect early this year.

The amendment — an equivalent of the Super 301 in the category of foreign exchange policies — mandates the Treasury to enact the clause based on whether a major U.S. trading partner has: a significant bilateral trade surplus with the United States, a material current account surplus and engaged in persistent one-sided intervention in the foreign exchange market. As Korea met the first two criteria but not the third, it could avoid designation as a country for enhanced analysis this time.

But it is too early to feel at ease. If our government believes foreign exchange rates are only determined by the market, that’s naïve. Foreign exchange is about diplomacy.

After the U.S. government openly criticized China for arbitrarily manipulating the yuan’s value, China concentrated on consolidating economic ties with the United States, which helped lead to the currency becoming one of the international trade settlement currencies. Abenomics has also enjoyed substantial benefits from the weaker yen in the past three years thanks to Uncle Sam’s tacit approval. Nevertheless, the honeymoon period is coming to an end, as seen in the rapid rise of the yen and yuan in foreign exchange markets last weekend, a sign of a U.S.-triggered global currency war.

Can we feel relief next year too? Hardly. If the United States decides to tackle the foreign exchange issue, it will likely find fault with Korea’s policies. Our government must do its best to avoid it.

Seoul must facilitate foreign exchange diplomacy with Washington to convince it that Korea’s surplus did not result from its trade surplus with the United States, but from decreased imports. The corporate sector also must reinforce its competitiveness instead of relying on foreign exchange policies.

JoongAng Ilbo, May 2, Page 30