A possible global currency war that might erupt amid escalating trade tensions between the world’s largest economies threatens to pose a complicated set of risks to the Korean economy.

US President Donald Trump last week accused China and the European Union of “manipulating their currencies and interest rates lower.”

Treasury Secretary Steven Mnuchin later put flesh on Trump’s accusation by saying Washington is closely monitoring whether China has manipulated its foreign exchange rate. His remarks were interpreted by some analysts as suggesting that Beijing could be designated as a currency manipulator in the Treasury’s next semiannual foreign-exchange policy report to be published in October.

The Chinese yuan has depreciated against the dollar by more than 6 percent since early May.

Devaluing its currency is seen as one of the instruments Beijing could use to counter Trump’s threats to ultimately impose tariffs on $500 billion in Chinese goods, covering nearly all of US imports from China. A stronger dollar would hurt the price competitiveness of American products overseas, making it hard for the Trump administration to reduce US trade deficits by slapping stiff import duties.

The Korean won is increasingly synchronized with the movement of the yuan as Korea depends on China, its largest trading partner, for nearly a quarter of its exports. In the Seoul foreign exchange market last week, the value of the won against the greenback plummeted to its lowest level in more than nine months.

Experts say a global currency war, which would make equities, oil and emerging-market assets tumble, could have more serious consequences for the economy than the fallout from tit-for-tat tariffs slapped by the US and China against imports from each other.

Ju Won, an economist at the Hyundai Research Institute, said there might be a possibility of China being drawn into an economic crisis in the aftermath of a trade dispute accompanied by a currency war with the US.

He noted an active counterstrategy was needed to “keep the Korean economy from being infected” by China’s economic troubles.

In the normal global trade circumstance, a weaker won may be expected to help bolster Korea’s exports, which have recently shown signs of losing traction.

According to government data, the country’s outbound shipments dropped 1.5 percent on-year in April, snapping a 17-month streak of increases.

They rebounded in May but fell again the following month. In the first 20 days of July, Korea’s exports rose 9.3 percent due mainly to an increase in the overseas shipment of chips, the global demand for which is forecast to slow in the coming years.

But intensifying trade friction between the US and its trading partners might limit the effect of a weaker won on Korea’s exports. Rather, the weakening of the currency would boost the prices of imported goods, further dampening the sluggish private consumption.

A weaker won could also be coupled with growing uncertainties about the global economy to accelerate capital flight from the country.

The Korean currency might begin strengthening if China refrains from keeping the yuan lower under increasing pressure from Washington and the US Federal Reserve responds to Trump’s displeasure with its planned rate hikes.

“It is difficult to predict the movement of the won down the road, as there exist factors that could both strengthen and weaken it,” said Chung Min, an HRI researcher.

“What is clear now is the fluctuation in the value of the won will be greater in accordance to the US-Sino conflict,” he said, indicating volatile exchange rates would make it hard for companies to work out long-term export strategies.

Financial authorities here will remain less active in intervening in the foreign exchange market as they were pressed by Washington and the International Monetary Fund in May into promising to begin disclosing records on currency interventions in the latter half of this year.

Experts say Korean companies need to step up efforts to offset a possible reduction in shipments to the US and China by exploring new opportunities that may stem from the trade friction between the world’s top two economies.

China is being pushed to open wider its domestic markets to make its case against what it has criticized as the Trump administration’s unruly protectionism. Korean exporters might use the US-Sino trade conflict to recover some of the US market shares lost to their Chinese competitors.

But such benefits would fall short of offsetting the overall damage that could be inflicted on the economy as a result of disruptions in the global trade system worked out in the early 1990s.

In its latest World Economic Outlook report, the IMF revised down its estimate for growth in global trade over the years through 2020 from 5.1 percent to 4.8 percent.

Experts say securing competitive edge in new industries by increasing research and development investments will be an effective way to overcome trade barriers erected across the world. Drastic deregulation is essential to enable local firms to ride on the new wave of technological innovations.

Korea also needs to be more active in joining and initiating multilateral trade frameworks.

Lee Jae-young, president of the Korea Institute for International Economic Policy, said the country should accelerate efforts to become a member of the 11-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership. He noted the CPTPP, which is expected to come into force early next year, would take the lead in setting up a new international trade order.

Among other countries touted to be seeking to enter the group are Britain, Thailand, Indonesia, Colombia and Taiwan.

By Kim Kyung-ho
(khkim@heraldcorp.com)