Explainer-Why South Korea can not make the identical US commerce deal as Japan

[ad_1] By Jihoon Lee and Yena Park

SEOUL (Reuters) -South Korea's negotiations with the U.S. on a commerce deal to decrease tariffs have stalled amid considerations over the international change implications of a $350 billion funding fund, a part of an settlement reached with President Donald Trump in July.

WHAT HAS JAPAN AGREED TO?

South Korean officers, who had argued that the bundle would largely comprise loans and ensures with restricted direct funding, mentioned final week they might not settle for phrases just like these of a $550 billion funding bundle finalised this month by Japan.

Tokyo agreed to switch cash inside 45 days after the U.S. selects a mission, and that accessible free money flows from investments could be cut up evenly till they reached an allotted quantity, after which 90% would go to the U.S.

U.S. Commerce Secretary Howard Lutnick mentioned on Thursday that there could be no flexibility for Seoul. "The Japanese signed the contract. The Koreans both settle for that deal or pay the tariffs. Black and white, pay the tariffs or settle for the deal."

HOW IS SOUTH KOREA'S SITUATION DIFFERENT FROM JAPAN'S?

Since South Korea's deal was introduced in late July, there have been considerations amongst market individuals that the ensuing greenback demand will overwhelm the home foreign money market, miserable the received .

Since struggling traumatic capital flight throughout a monetary disaster within the late Nineteen Nineties, South Korea has retained a decent grip on its foreign money market. It began opening it to foreigners final yr however there's nonetheless no offshore market to commerce the received.

The every day common international received commerce stood at $142 billion in 2022, in contrast with $1.25 trillion for the Japanese yen, in response to a triennial survey by the Financial institution for Worldwide Settlements. The received accounted for two% of world market share, towards 17% for the yen.

WHY IS IT SOUTH KOREA PARTICULARLY WORRIED?

The received hit a 15-year low on the finish of final yr at round 1,476 to the greenback and now stands round 1,390.

Market individuals say the $40 billion wanted by the state pension fund yearly for its abroad investments is already a heavy burden on the foreign money. Citi estimated that the funding bundle would generate greenback demand of round $100 billion annually from 2026 to 2028.

South Korea's economic system is far smaller than Japan's. It had a present account surplus of $99 billion final yr, in contrast with Japan's surplus of practically $200 billion, and central financial institution international reserves of $416 billion in August, in contrast with Japan's $1.3 trillion.

HOW IS SOUTH KOREA TRYING TO MITIGATE THE IMPACT?

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The concept of looking for a international change swap line with the U.S. was raised publicly by Presidential Coverage Secretary Kim Yong-beom final week, when he mentioned the yen's standing as a key worldwide foreign money and a limiteless swap line between Japan and the U.S. put Tokyo in a stronger place.

Finance Minister Koo mentioned final week there could be an announcement on international foreign money when tariff negotiations conclude and he instructed Reuters on Monday he thought the U.S. would "ponder" a foreign money swap line, after an area media outlet mentioned the federal government had handed the request to the U.S.

WHICH COUNTRIES HAVE FX SWAP LINES WITH THE US?

The U.S. Federal Reserve has standing swap line preparations with the central banks of Canada, Britain, Japan, the European Union and Switzerland.

It established momentary swap traces of $60 billion every with the Financial institution of Korea and eight different central banks in March 2020 throughout the COVID-19 pandemic.

After the swap line expired in December 2021, the Fed provided the Financial institution of Korea a security internet of $60 billion by means of repurchase agreements, enabling it to borrow {dollars} with its holdings of U.S. Treasuries as collateral.