Korea needs to walk tightrope between US and China

'US-first' policy to see minimal change

By Lee Kyung-min

The government will have to seek a continued balance between the U.S. and China regardless of who wins the American presidential election, because many of its policies will be crafted in response to the world's two-largest economies struggle for hegemony, experts said Wednesday.

Economic ties will become more important given a prompt, near-term resolution of political and diplomatic issues is unlikely among many countries with varying vested interests.

The Korean won is likely to strengthen for the time being, driven both by the Chinese yuan gaining strength as the U.S. dollar weakens - a highly concerning scenario for export-oriented Korea, which needs to identify sources for an economic recovery amid the COVID-19 pandemic.

New Northern Policy

Local pundits are paying keen attention as to how much of a change will be in store concerning Korea's “New Northern Policy,” a key initiative of President Moon Jae-in to identify new sources of economic growth overseas and to diversify energy, supply and logistics bases.

The policy seeks to bolster diplomatic and economic relations with what his administration calls “New Northern Nations,” including China, Russia and North Korea, and others mostly in Central Asia.

Hanyang University Graduate School of International Studies professor of Russian Studies Eom Gu-ho said the U.S.' China policy will not see any fundamental change regardless of who wins, because the world's two largest economies will continue with their drawn-out struggle for hegemony.

“Whether it is U.S. Democratic presidential nominee Joe Biden, or President Donald Trump, it doesn't matter,” he said.

But Washington's North Korea policy will undergo a major change because, unlike Trump, who sought a “top-down” approach to denuclearization of the Korean Peninsula, Biden will seek a “bottom-up” approach backed by strengthening bilateral cooperation with allies, South Korea included.

Biden winning will also highlight the importance of the policy due mostly to increased sanctions against both Russia and North Korea, because the only way to seek resolution of a slew of political issues will be building trust through strengthening economic ties.

Soaring won

The local currency will continue to strengthen rapidly against the dollar, regardless of who wins, as the two candidates share a commitment to maintaining expansionary fiscal policies to tackle the COVID-19 pandemic.

The local currency is hovering at around the 1,130 won-level, hitting an 18-month high. But market watchers say it could drop to 1,100 won to the dollar.

The U.S. Federal Reserve said in September it would maintain the target for the federal funds rate at a range of 0 percent to 0.25 percent. It also signaled that the policy rate will be kept at “near-zero” until at least 2023, an announcement welcomed by Trump who repeatedly said a strong dollar was “bad for U.S. firms.”

The clear expansionary-leaning stance will be maintained or amplified further under Biden whose campaign pledges include injecting a massive stimulus package of $2.2 trillion during his term, according to Meritz Securities chief economist Stephen Lee.

“The view on the appreciation of won is gaining ground due to bleaker prospects of a global economic recovery, a key driver of the dollar losing value,” he said.

This is coupled with the sustained appreciation of the Chinese yuan which moves in sync with the Korean currency.

The yuan will likely strengthen, as illustrated by China's recent measure dubbed “dual-circulation,” a state-led five-year plan to promote consumption to help bolster economic development.

“The much-emphasized need to boost domestic consumption means China essentially saying that it is willing to let its currency gain value for the time being,” Standard Chartered Bank Korea investment strategist Hong Dong-hee said. “This is a rare move considering the two countries have been in a heated conflict making accusations about currency manipulation as part of efforts to help their export firms whose earnings will be greater if their currencies are weaker.”

Yet the continued and sustained appreciation of the local currency will sap the competitive edge of local export firms, ending up tightening domestic consumption, a combination that will frustrate the prospect of a much-awaited economic recovery.

Deputy Prime Minister and Finance Minister Hong Nam-ki has repeatedly hinted at intervening in the local foreign currency market as a pre-emptive measure to limit swings in the value of the won hit by supply and demand mismatches amid continued market volatility.

Change in U.S.-China relations unlikely

Korea needs to facilitate technological development, an objective just as important as diversifying trading partners to reduce reliance on China, according to Korea Institute for International Economic Policy (KIEP) senior research fellow Yang Pyeong-seob.

“The problem is that China takes us for granted,” he said.

China is Korea's largest trading partner, importing about 25 percent of goods produced here, a major reason China thinks it has leverage over Korea.

But China is buying goods from Korea, he noted, not as a favor but because it needs them. The only way to change the behavior of China therefore is to advance technologies to a degree that it can no longer dismiss the reliance on its neighboring producer and supplier of goods of pivotal importance to its economy.

Yang continued, “China will not change until it realizes that it needs Korea more than Korea needs it, something China will never come to terms with on its own.”

The daunting task of technological advancement will be buoyed by Korea's gradual yet inevitable decrease in its dependence on China, according to Moon Jong-chol, a research fellow at the Korea Institute for Industrial Economics & Trade (KIET).

“It's a matter of when, not if,” he said. Local firms operating in China will see their corporate profit declining due to a variety of unfavorable business conditions there, notably rising wages. “It will take about ten years from now for them to begin pulling out. By then, many Southeast Asian countries may be able to improve their manufacturing capabilities enough for Korea to consider them as viable trading partners. Either way, Korea's dependence on China will decrease.”