By Kim Tae-gyu
Staff Reporter

As the United States and China are poised to clash over exchange rates, Korea is scrambling not to become sandwiched behind the world's two largest economies.

Prime Minister Chung Un-chan told a state policy coordination committee meeting Friday that the Seoul administration must be prepared for any aftermath in the brewing tension over China's fixed exchange rate.

"Seeking an economic recovery through exports, the U.S. is currently stepping up its push to make China appreciate the yuan, with tension expected to rise further," Chung said.

"Since they are the two most important trade partners for Korea, we are concerned that the conflict between them might exert a negative influence on Korea both directly and indirectly."

China's yuan is pegged to the U.S. dollar at a rate of about 6.8 to one, leading U.S. exporters to complain that Beijing's currency is undervalued and is undermining their price competitiveness.

In this climate, 130 lawmakers in the U.S. House of Representatives have urged the U.S. government this week to label China a currency manipulator in its report slated for April 15.

Earlier this week, a bipartisan group of U.S. Senators also presented legislation that could make the U.S. levy duties on some Chinese merchandise if the populous nation does not raise the value of its currency.

Should the Barack Obama administration blacklist China as a currency manipulator and put higher tariffs on Chinese goods, the wrangling between the two superpowers - dubbed G-2 - could lead to a trade war. If this happens, Korea could suffer.

The Korea International Trade Association (KITA) said that the Sino-American feud is the single-most important risk for Asia's fourth-largest economy.

"Last year, the U.S. recorded a $226.8-billion deficit with China, accounting for 60 percent of its total. Accordingly, it is highly likely to continue to press for a revaluation of the yuan," KITA senior economist June Park said.

Park came up with a pair of scenarios of how things will evolve. The first is that the U.S. excludes China from the currency manipulators' list while China appreciates the yuan. The second is that China charges retaliatory duties or sells off U.S. bonds in bulk after it is classified as a manipulator.

"The second scenario is not plausible because the two countries would want to avoid a disaster. If it materializes, however, the results would be catastrophic not merely to Korea but to all countries," Park said.

"The negative impact would be as big as those of the global financial crisis, which dented the world's economies in late 2008. In that case, I am afraid that we will hardly be able to grapple with the aftermath."

As other risks lying ahead of the country, the state-run KITA picked fragile economies in southern Europe, financial regulations in the U.S. and the launch of exit strategies by China.

To best deal with these, KITA said that Korea is required to increase its foreign exchange reserves and build buffers such as currency swap contracts with a host of advanced economies.

Over the long haul, the agency asked the administration to reduce sovereign debt, which has snowballed while fighting the economic downturn over the past two years, to achieve better financial health.

voc200@koreatimes.co.kr