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By Kim Jae-kyoung
SINGAPORE -- Korea faces a dilemma as its foreign exchange policy is emerging as a source of tension with the U.S. leading up to the much-anticipated rate hike by the Federal Reserve.
Tension is expected to escalate further in the coming months once the Fed starts liftoff at the Dec. 15-16 meeting, which will complicate Korea's currency decisions.
Some analysts say Korea could be labeled as a currency manipulator next year as the U.S. might victimize some Asian countries to stave off growing political pressure from U.S. manufacturers, particularly automakers.
"Korea was named a currency manipulator in the first U.S. Treasury report in 1988 and is once again in the crosshairs," said Marcus Noland, director at the Peterson Institute for International Economics (PIIE), in a report.
"Indeed, if the Treasury comes under pressure to ‘do something' to forestall more rash initiatives in the Congress, Korea and Taiwan are likely to be at the top of the list."
China and Japan are unlikely to be cited as currency manipulators, in that the U.S. government, in the report, acknowledged that China has made some progress, while seeing Japan's quantitative easing (QE) policy as a market-driven rate movement.
Though neither Korea nor any other country is identified as a currency manipulator yet, Korea stands out against other countries in the Treasury report on foreign exchange policies released on Oct. 19.
The Treasury made several complaints about Korea, such as maintenance of a large current account surplus, an undervalued Korean won, market intervention to limit appreciation and lack of transparency about intervention.
"There is no better evidence of the importance of this issue than the fact that U.S. President Barack Obama raised the currency issue with President Park Geun-hye at their meeting in October," Noland said.
In contrast, the Korean government has a different view.
"I don't think that the U.S. is now in a position to criticize (us). The standard for what is undervalued is vague. They regarded the won as ‘undervalued' even when it traded at around 900 won to the dollar," said a ranking official at the Ministry of Strategy and Finance, asking not to be named.
"That's the viewpoint from their industries' own self-interest. It is inevitable that the won will weaken as the dollar strengthens over the next few years as a consequence of the Fed's rate increase."
Growing pressure from US
Over the past year, several U.S. lawmakers have made radical legislative proposals that require the U.S. government to take more specific actions, such as conducting in-depth analysis of countries that have a large trade surplus or excluding them from government procurement.
Noland pointed out that the U.S. auto assemblers, such as Ford and GM, were the prime political drivers behind these proposals. Ford was a vocal opponent of the Korea-U.S. free trade agreement.
These moves are seen as preemptive actions as the U.S. credit-tightening will strengthen the dollar and widen trade account deficits.
This will cause U.S. manufacturers to push the government to take action, which analysts expect will eventually burden its trading partners.
"I am sure the U.S. will continue to apply pressure (on Korea)," said Mauro Guillen, director of the Wharton School at the University of Pennsylvania. "The issue is if it is wise for Korea to challenge the U.S. now when there are trade (the Trans-Pacific Partnership (TPP) negotiations going on."
Some analysts say that Korea should brace itself for any possible disputes with the U.S. over foreign exchange policies by articulating a strong position.
"I think Korea should develop a clear position and remain firm against U.S. pressure," Advanced Capital Partners Chairman James Rooney told The Korea Times.
He stressed that as a sovereign nation Korea should look after its own interests as a first priority in spite of political pressure from trade partners that has no basis in economic realities.
"I sense that Korean government officials are reluctant to do this job properly because of the excessive jawboning and implicit bullying that they feel they will get from their U.S. counterparts," he said.
Shin Jang-sup, economics professor at National University of Singapore, said that it is unfair to evaluate the optimal level for exchange rates only with the trade account balance.
"U.S. trade account deficits are expected to continue to rise in the current situation where speculative transactions account for more than 95 percent of its total currency trading," Shin said.
"The U.S. must explain why its argument that the dollar is overvalued is valid. It is nonsense that the U.S. is admonishing other countries for market interventions without justifying the level of dollar value."
