Facing Rule Change
The Institute of Foreign Affairs & National Security of the Korea National Diplomatic Academy mentioned in a recent report that the Donald Trump administration is likely to include South Korea in its list of exchange rate manipulators in the first half of this year. The Korea Institute for International Economic Policy (KIEP) presented a similar analysis on January 4, too. According to U.S. law, companies in exchange rate manipulators can be blocked from participating in U.S. government procurement markets and strong sanctions in terms of foreign exchange rate and so on can be imposed on those countries via the IMF.
“The Donald Trump administration is likely to target South Korea and Taiwan first in order to put pressure on China while avoiding a head-on collision with China,” the KIEP explained. Back in 1988, the United States had designated South Korea and Taiwan as exchange rate manipulators based on the Omnibus Trade and Competitiveness Act of 1988. China had been designated four years later.
The Department of the Treasury of the United States designates as a foreign exchange manipulator a country whose trade surplus with the U.S. exceeds US$20 billion a year, current account surplus-to-GDP ratio is 3% or more and one-way intervention in the forex market is equivalent to at least 2% of its GDP. In the Treasury Department’s foreign exchange reports released in April and October last year, South Korea was on the monitoring list, a step prior to the designation, by not satisfying the third condition.
“The U.S. government is likely to urge the South Korean foreign exchange authorities to increase the level of transparency regarding market intervention,” the KIEP went on to say, adding, “Then, the authorities may have to disclose the history of foreign exchange market intervention for the first time since the opening of the local market in 1962.” In its report released in October last year, the Treasury Department criticized South Korea for not sharing the information. In the past, South Korea had enhanced the transparency in 1990, two years after the designation, by switching from multi-currency basket to market average exchange rate.
“The three conditions are not legal requirements but the Treasury Department’s discretionary criteria and, as such, Secretary of the Treasury nominee Steven Mnuchin can change the rules of the game to fulfill the promise of the President-elect to include China in the list of manipulators,” the Institute of Foreign Affairs & National Security pointed out, continuing to say, “In that case, South Korea is likely to be put on the list as well with South Korea satisfying two out of the three conditions while China satisfying only the one as to trade surplus.”
If so, the value of the South Korean currency is likely to show a steep rise. Then, South Korea’s exports can take a direct hit as in the case of small and medium-sized enterprises, which are particularly vulnerable to exchange rate fluctuations