Explainer-Why South Korea cannot make the same US trade deal as Japan
By Jihoon Lee and Yena Park
SEOUL (Reuters) -South Korea’s negotiations with the U.S. on a trade deal to lower tariffs have stalled amid concerns over the foreign exchange implications of a $350 billion investment fund, part of an agreement reached with President Donald Trump in July.
WHAT HAS JAPAN AGREED TO?
South Korean officials, who had argued that the package would mostly comprise loans and guarantees with limited direct investment, said last week they could not accept terms similar to those of a $550 billion investment package finalised this month by Japan.
Tokyo agreed to transfer money within 45 days after the U.S. selects a project, and that available free cash flows from investments would be split evenly until they reached an allocated amount, after which 90% would go to the U.S.
U.S. Commerce Secretary Howard Lutnick said on Thursday that there would be no flexibility for Seoul. “The Japanese signed the contract. The Koreans either accept that deal or pay the tariffs. Black and white, pay the tariffs or accept the deal.”
HOW IS SOUTH KOREA’S SITUATION DIFFERENT FROM JAPAN’S?
Since South Korea’s deal was announced in late July, there have been concerns among market participants that the resulting dollar demand will overwhelm the domestic currency market, depressing the won .
Since suffering traumatic capital flight during a financial crisis in the late 1990s, South Korea has retained a tight grip on its currency market. It started opening it to foreigners last year but there is still no offshore market to trade the won.
The daily average global won trade stood at $142 billion in 2022, compared with $1.25 trillion for the Japanese yen, according to a triennial survey by the Bank for International Settlements. The won accounted for 2% of global market share, against 17% for the yen.
WHY IS IT SOUTH KOREA PARTICULARLY WORRIED?
The won hit a 15-year low at the end of last year at around 1,476 to the dollar and now stands around 1,390.
Market participants say the $40 billion needed by the state pension fund every year for its overseas investments is already a heavy burden on the currency. Citi estimated that the investment package would generate dollar demand of around $100 billion each year from 2026 to 2028.
South Korea’s economy is much smaller than Japan’s. It had a current account surplus of $99 billion last year, compared with Japan’s surplus of nearly $200 billion, and central bank foreign reserves of $416 billion in August, compared with Japan’s $1.3 trillion.
HOW IS SOUTH KOREA TRYING TO MITIGATE THE IMPACT?