Korea should brace for US-China currency war

By Lee Kyung-min

• Published May 29, 2019 5:03 PM KST
• Updated May 30, 2019 2:16 PM KST

China, Korea remain on US currency watch list

By Lee Kyung-min

Korea should prepare for the possibility of the ongoing China-U.S. trade dispute developing into a full-fledged currency war, experts said Tuesday.

They believe Korea needs to come up with a contingency plan as it is one of the countries that stands to lose the most amid the power struggle between the world's two largest economies.

“The possibility is always there,” said Sung Tae-yoon, an economist at Yonsei University.

“The ongoing trade dispute is on a continued path of escalation with truces in between, and the issue will continue affecting the economies of many other export-reliant countries.”

The comments came after U.S. Commerce Secretary Wilbur Ross said May 23 in a statement: “The Department of Commerce can countervail currency subsidies that harm U.S. industries. Foreign nations would no longer be able to use currency policies to the disadvantage of American workers and businesses.”

Beijing has been allowing the Chinese yuan to lose value against the U.S. dollar in a tit-for-tat move against Washington's series of tariff measures. The yuan is now hovering around 6.9 per dollar.

In a semiannual report to Congress made public May 29, the U.S. Treasury Department kept China and Korea on a list of countries to monitor for currency practices alongside Japan, Germany, Italy, Ireland, Singapore, Malaysia and Vietnam.

“The Korean won has been weakening over the past few months, not as a result of government intervention but because the country's economy has suffered a huge blow. But if the U.S. views it otherwise, it can become a problem,” Sung said.

The government, therefore, should maintain that the currency is set in the market and convince the U.S. that the country is not trying to help buoy the economy by “manipulating” currency values, he said.

Antonio Fatas, an economics professor at INSEAD, said the ongoing dispute revolves around the same two questions: Is Trump's administration fighting a war it can never win or is it all a sideshow to gain political capital at home by arguing that it is being tough with China? Or will Trump realize the current strategy is hurting the U.S. as well?

He added if the two countries do not reach a trade deal, the conflict is headed for further escalation and disruption that will affect the global economy.

“The U.S. administration had a chance to sign a trade deal and finish the trade war but they decided to escalate the war in order to get further concessions. I am not sure China is willing to go along both for strategic and political reasons,” he said.

Fatas said there is very little anyone can do in the short run.

“In the long run there is the realization that the U.S. cannot be trusted as a trade partner and that there will be more international and economic conflict and uncertainty in the world if the country is run by an administration like the current one.”

Xu Xiao Chun of Moody's Analytics said the situation is likely to develop into a tariff war.

The Korean current account surplus can be easily explained by competitiveness in high-tech manufactured goods in electronics, vehicles and shipbuilding. Exchange rates are however determined by various factors, including economic fundamentals both domestic and international.

Therefore, it could be used as an excuse to expand U.S. protectionist policies under the Trump administration with the automotive industry being particularly vulnerable.

“I think it's more probable that the issue will manifest in the U.S. imposing higher tariffs against other countries,” he said.

Some economists, however, said the possibility of the China-U.S. trade dispute turning into a full-fledged currency war is rather low at this point as China stands to lose more than it would gain.

“If the current trade restrictions become more severe following a currency intervention, the Chinese economy will slow down further and the Chinese government does not want that,” said Park Chong-hoon, chief economist at SC First Bank.

The scenario involving confrontation may trigger foreign capital outflow from China in the process, a much-dreaded unintended consequence.

“Besides China, other countries engaged in trade disputes with the U.S. include Japan and European nations, and China has no reason to resort to an outright currency intervention that will undoubtedly make the U.S. mobilize its full focus in a fight against China,” Park said.

He expects that if the Chinese currency drops below 7 yuan against the greenback, the Korean won will fall to 1,250 won against the U.S. dollar. The won, which has continued to lose ground against the greenback since the beginning of 2019, is now trading at around 1,190 per dollar.

“Many speculative forces in the market are currently betting that the Korean currency will weaken further, especially after the economy contracted in the first quarter of the year,” he added.