Finance ministry says currency deal is separate from FTA
By Yoon Ja-young
After Korea and the United States agreed to improve the transparency of Seoul's foreign exchange market, concern is mounting that the country might lose sovereignty over its exchange policies. The finance ministry stressed that the discussion on foreign exchange policy was not related to revisions of the Korea-U.S. free trade agreement (KORUS FTA).
"The foreign exchange rate is a multilateral issue and it should not be dealt with in bilateral talks. The United States had tried to link it with the KORUS FTA revision talks, but we rejected this. The talks about foreign exchange have been going on separately from the FTA," a ranking official at the ministry said.
The two countries reached an agreement in principle for amending the KORUS FTA, following President Donald Trump's claim that it was costing jobs in the United States on top of widening its trade deficit with Korea. The amendment includes the further opening of the local market to U.S. automobile manufacturers.
The agreement, however, caused controversy following a U.S. report that Korea also agreed to amend "unfair currency practices."
"On a separate track, the Treasury Department is finalizing an understanding with South Korea to avoid practices that provide an unfair competitive advantage," the White House noted on its Website.
"The provisions of the understanding include strong commitments on exchange rate practices, robust transparency and reporting, and a mechanism for accountability," it added.
The United States Trade Representative (USTR) also said in a media release, "An agreement (memorandum of understanding) is being finalized on robust provisions to prohibit competitive devaluation and exchange rate manipulation in order to promote a level playing field for trade and investment. Strong commitments on transparency and accountability are included in the provisions."
Smoothing operations
The government and central bank have been engaged in "smoothing operations" on the foreign exchange market, to decrease fluctuations by selling or buying dollars on the market. However, they have not disclosed such interventions since the opening of the foreign exchange market.
The finance ministry official pointed out that the International Monetary Fund (IMF) also recommends disclosing intervention.
"In the context of the strong commitment to exchange rate flexibility, policymakers should clarify their foreign exchange intervention policy," the IMF noted in its 2017 annual consultation with Korea, though it added that the foreign exchange intervention appeared limited.
"The key measure to enhance transparency is to disclose intervention in the foreign exchange market. Korea is one of the few major countries not disclosing it, along with India, Saudi Arabia and Turkey," the ministry official said.
Such a measure can also help Korea avoid designation by the United States as a foreign exchange rate manipulator in April. In its semiannual report, the U.S. Treasury Department designates a nation a currency manipulator if it meets three criteria: a current account surplus larger than 3 percent of GDP, more than a $20 billion annual trade surplus with the U.S., and the purchase of dollars amounting to over 2 percent of GDP. Korea was on the monitoring list in the October report as it met the first two of the three conditions. The April report is likely to be similar as Korea continues to meet these two.
However, there is concern that Korea will lose sovereignty in foreign exchange policies due to the negotiations. "For small, open economies such as Korea, foreign exchange policy makes a big difference. The government should note that other emerging countries don't reveal their interventions since they have to stabilize the market," an economist said.
By Yoon Ja-young
After Korea and the United States agreed to improve the transparency of Seoul's foreign exchange market, concern is mounting that the country might lose sovereignty over its exchange policies. The finance ministry stressed that the discussion on foreign exchange policy was not related to revisions of the Korea-U.S. free trade agreement (KORUS FTA).
"The foreign exchange rate is a multilateral issue and it should not be dealt with in bilateral talks. The United States had tried to link it with the KORUS FTA revision talks, but we rejected this. The talks about foreign exchange have been going on separately from the FTA," a ranking official at the ministry said.
The two countries reached an agreement in principle for amending the KORUS FTA, following President Donald Trump's claim that it was costing jobs in the United States on top of widening its trade deficit with Korea. The amendment includes the further opening of the local market to U.S. automobile manufacturers.
The agreement, however, caused controversy following a U.S. report that Korea also agreed to amend "unfair currency practices."
"On a separate track, the Treasury Department is finalizing an understanding with South Korea to avoid practices that provide an unfair competitive advantage," the White House noted on its Website.
"The provisions of the understanding include strong commitments on exchange rate practices, robust transparency and reporting, and a mechanism for accountability," it added.
The United States Trade Representative (USTR) also said in a media release, "An agreement (memorandum of understanding) is being finalized on robust provisions to prohibit competitive devaluation and exchange rate manipulation in order to promote a level playing field for trade and investment. Strong commitments on transparency and accountability are included in the provisions."
Smoothing operations
The government and central bank have been engaged in "smoothing operations" on the foreign exchange market, to decrease fluctuations by selling or buying dollars on the market. However, they have not disclosed such interventions since the opening of the foreign exchange market.
The finance ministry official pointed out that the International Monetary Fund (IMF) also recommends disclosing intervention.
"In the context of the strong commitment to exchange rate flexibility, policymakers should clarify their foreign exchange intervention policy," the IMF noted in its 2017 annual consultation with Korea, though it added that the foreign exchange intervention appeared limited.
"The key measure to enhance transparency is to disclose intervention in the foreign exchange market. Korea is one of the few major countries not disclosing it, along with India, Saudi Arabia and Turkey," the ministry official said.
Such a measure can also help Korea avoid designation by the United States as a foreign exchange rate manipulator in April. In its semiannual report, the U.S. Treasury Department designates a nation a currency manipulator if it meets three criteria: a current account surplus larger than 3 percent of GDP, more than a $20 billion annual trade surplus with the U.S., and the purchase of dollars amounting to over 2 percent of GDP. Korea was on the monitoring list in the October report as it met the first two of the three conditions. The April report is likely to be similar as Korea continues to meet these two.
However, there is concern that Korea will lose sovereignty in foreign exchange policies due to the negotiations. "For small, open economies such as Korea, foreign exchange policy makes a big difference. The government should note that other emerging countries don't reveal their interventions since they have to stabilize the market," an economist said.
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