South Korea is facing increased odds of being desingated by the United States as a currency manipulator amid the escalating trade war between the U.S. and China.
South Korea has been on the U.S. Treasury Department’s monitoring list since April 2016. However, the department could designate South Korea, along with China, as a currency manipulator on October 15.
Under the circumstances, the South Korean government is having talks with the department in order to avoid the designation to explain its measures to improve the transparency of its foreign exchange market along with its foreign exchange policy and reasons for its sustained current account surplus. To the same end, Deputy Prime Minister Kim Dong-yeon is going to meet with U.S. Treasury Secretary Steven Mnuchin during this year’s annual meeting of the IMF and the World Bank scheduled for October 11 to 15.
Any country is designated as a currency manipulator by the U.S. Treasury Department when its trade surplus with the U.S. exceeds US$20 billion, its current account surplus exceeds 3% of its GDP, and its net foreign exchange buying exceeds 2% of its GDP. At present, South Korea is satisfying the first and second conditions.
The increased likelihood has to do with the intensifying trade disputes between the U.S. and China. The U.S. has put pressure on China by using high tariff rates. The trade disputes are likely to lead to a currency war and the designation of China as a currency manipulator.
South Korea cannot be free from the situation. As of 2015, China and South Korea satisfied one and two of the conditions, respectively. For the U.S. to designate China as a currency manipulator, the conditions should be relaxed, and the relaxation means higher risks for countries like South Korea and Taiwan.
Once China is designated as a currency manipulator, China is compelled to appreciate the yuan, and then its exports to the U.S. are affected and South Korea has no choice but to appreciate the won given its high reliance on the Chinese economy. The yuan and the won have moved in sync with each other since the beginning of this year. A decline in finished goods exports from China to the U.S. means a decline in exports from South Korea to China, which are divided into 34% for consumption in China and 65.3% for re-export in the form of processing trade (49.6%) and bonded trade (15.7%).
The trade war between the two superpowers and its consequences are likely to deal a severe blow to the South Korean economy. Actually, a number of South Korean companies are already taking a hit. According to the IMF, South Korea’s economic growth rate falls 0.5 percentage points every time China’s falls one percentage point.