Nation needs to prepare for worst-case scenario
It’s not clear yet whether Japan’s intervention in the currency market last week could spread to a global currency war. More likely, however, is that it might have caused a crack in international cooperation maintained since 2008 to avoid a 1930s-style economic crash. And that can’t be good news for Korea, either ― economically and diplomatically.
Tokyo’s first manipulation of the foreign exchange rate in more than six years was due in large part to political motives: Prime Minister Naoto Kan needed to show he is a leader who can take action for Japan’s interests despite foreign pressure. The move was more symbolic than substantive, however, as it has become long apparent that a single government cannot counter far bigger market forces.
What might have made the Japanese government make the move, then? Tokyo had to show to the world it would not ― and cannot ― let its currency go up to hamper its fledgling recovery and push it back to another lost decade.
The problem is, the United States is in even more serious economic trouble to consider others’ situations. Reeling under twin deficits with its interests having nowhere to fall further, Washington has no other means but to export its way out of the economic doldrums. This explains why America has long pressured China to drop its currency’s artificial peg to the dollar and let it move more freely reflecting market forces. Unfortunately, Beijing seems to think its exports have yet to reach their pre-crisis levels.
What would all these add up to? Maybe not another global currency ― and trade ― war provided four major economic powers, including the EU, realize the common risk in the resurrection of protectionism.
But it could mean considerable appreciation of currencies for countries with sizable trade surpluses, like Korea. In a worse-case scenario, Seoul might be forced to revalue its monetary unit back to pre-Asian currency crisis levels of below 1,000 won per greenback, which, depending on how long such a situation is allowed to develop, could throw this country into extreme chaos.
So what the country should do to avoid this grim situation is evident. First of all, Korean industries ought to sharpen their non-price competitive edge by upgrading quality and diversifying export destinations. The recent conclusion of a free trade accord with the EU was a step in the right direction in this regard.
Second, as the chair country of the next G20 summit in November, the Korean government will also need to play a more bold economic initiative in persuading existing and emerging economic powers to resist the temptation to return to the live-and-let-die, beggar-thy-neighbor protectionism.
Third, the government also should take extra care to carefully manage the issues at the Seoul summit, and not let it fall to the venue of a currency duel between the G2 ― U.S. and China ― backed by their respective supporting nations, as the U.S. Treasury Secretary Timothy Geithner is now vowing to do. It should be remembered for more productive, historically significant accomplishment than that.
These urgent external situations provide all the more reasons the Lee Myung-bak administration cannot remain mired in a mess caused by ethical controversies.
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