[Hankyung Essay] Tariff War and Fear of High Exchange Rates

Jeong Hee-su, Head of Hana Financial Research Institute

It has already been about a year since U.S. President Donald Trump took office. Looking back, many unpredictable things happened in a short period. With the start of Trump's second term, the United States strengthened its America First policy and even withdrew from the World Trade Organization (WTO), effectively declaring the end of globalization as maintained for the past 30 years. In the past, relying on China as a production base allowed countries around the world to consume and manufacture at low prices and grow steadily with low inflation. However, the situation changed rapidly after the COVID-19 pandemic. With borders closed, a self-help path opened up, and the United States declared a tariff war against the world in pursuit of its own interests.

From early in his administration, Trump raised tariff issues and has imposed high tariffs and pursued bilateral negotiations with major countries starting with China, then Europe, Japan, and South Korea. In particular, as investment negotiations worth US$350 billion have dragged on, the won-dollar exchange rate has not fallen from the 1,400-won level. In addition, large corporations plan to invest about US$150 billion in plant construction funds over five years, and domestic individual investors investing in U.S. stocks are expected to continue investing in U.S. equities for the time being, making factors that weaken the won inevitably strong from a foreign exchange supply-demand perspective. Also, as global capital flows into the United States, the U.S. economy is expected to remain at a favorable level in the mid-to-late 1% range. Uncertainty over a U.S. rate cut is also increasing. Ultimately, a high exchange rate is taking hold as the 'new normal.'

Historically, what has the 1,400-won exchange rate meant to us? It has occurred only four times: the foreign exchange crisis (1997), the global financial crisis (2008), the U.S. rate-hike period (2022), and domestic political instability (2024). Recently, the occurrences have become more frequent. Because the 1,400-won level serves as a criterion for judging the precursor of a crisis in Korea, it is an important milestone in finance.

According to a report written last November by Steven Myron, a Federal Reserve (Fed) board member, the United States ultimately wants a weaker dollar. This is because a weak-dollar policy will be necessary one to two years after most of the factories built with funds invested in the United States are completed, in order to export the products produced at those factories. This is why talk of a 'second Plaza Accord' emerged early in the Trump administration.

The problem is that even with this change in stance, it may take considerable time before the won-dollar exchange rate returns to a downward trend. It remains to be seen how the market will react to the Korea-U.S. exchange rate policy agreement concluded earlier this month, but maintaining external credibility is very important for exchange rate stability.

October is the time when many companies draw up next year's business plans. However, with exchange rate uncertainty increasing, companies are finding it difficult to formulate plans. In particular, red lights are on for managing exchange-rate risks not only at year-end but also for next year. I hope tariff negotiations can be amicably concluded as soon as possible so that the exchange rate can stabilize downward.