Ill-advised view on Washington’s classification of Seoul’s forex policy

The U.S. Department of Treasury has included South Korea, China, Japan, Germany and Taiwan on its "Monitoring List" on Friday. None of them has been designated as a currency manipulator, which had drawn keen attention. It is worrisome, however, in that it is the first comprehensive, in-depth list that has been drafted in line with the Bennet-Hatch-Carper amendment, and chances are high that countries on the "Monitoring List" could be designated as currency manipulators in the future. All five countries are economic powers that have a strong export sector. The latest measure is also annoying since it heralds signs of the U.S. shifting towards protectionist trade policy, as the country is saddled in prolonged economic recession.

Until as recently as in August last year when China deval‎ued its currency in a surprise move, the U.S. Department of Treasury said that it understand China's move as economic countermeasure. It was also seen accepting the Japanese authorities’ explicit bid to depreciate the yen. It is somewhat regrettable that Korea has been placed on the "Monitoring List," just like such countries as China and Japan. The U.S. is taking a hardline stance, as demonstrated by even disclosing estimated value of currency spent on intervention in the foreign exchange market by those on the list, saying that it will eval‎uate them by closely examining economic trends and foreign exchange policy. It also warned that Korea should limit its forex market intervention only to circumstances of disorderly market conditions and to increase the transparency of its foreign exchange operations, and enhance transparency in policy.

Korea's immediate concern is psychological agitation in the foreign exchange market. The won-dollar exchange rate, which stood at the 1,200-won level in early this year, fell to the 1,100-won level due to expectations that Washington would issue an warning not to use currency deval‎uation policy. Chances are high that the won-dollar rate will fall further going forward. It is feared that even "smoothing operation," which the forex authority has been using when and if the exchange rates fluctuate significantly, could be restricted as well. Korea will also find it difficult to improve its export, which has backpedaled for the longest ever duration of 16 consecutive months. It could be also practically difficult for Seoul to use "Korean quantitative easing" because this effectively constitutes an exchange rate policy that can create an environment favorable to the nation’s export.

As advanced nations, which have failed to generate notable effect in boosting their economies through fiscal policy, are making all-in bets in monetary policy, the world is engaging in currency war. The U.K. and Canada announced their planned introduction of minus interest rate policy, and even Singapore is implementing quantitative easing, as the war is spreading to Asia. If Europe and Asia go into currency war, chances are high that individual economies will use retaliatory trade measures, and if China counters by deval‎uing its currency, the global economy will inevitably fall into a tailspin. The Korean economy, which suffered a setback in economic fundamentals due to negligence in structural reform, is in a serious dilemma. Even so, Finance Minister Yoo Il-ho said, “No worries," and the Strategy and Finance Ministry commented that the fact Korea was not designated as a currency manipulator is a feat in economic diplomacy that was achieved thanks to the deputy prime minister’s persuasion of the U.S. These are ill-advised views that are truly pitiful. The reason is that this could be seen as "stepping up pressure" even by presenting an estimated value of market intervention that is very sensitive to the trading partners.

허문명논설위원 angelhuh@donga.com