**Title: South Korea Re-designated as Currency Watch List Country by U.S.**
South Korea finds itself in a difficult situation after being re-designated as a currency watch list country by the United States, ahead of the potential start of a second Trump administration. If broad tariffs become a reality, a stronger dollar—and consequently a weaker won—is expected. Being on the currency watch list means that South Korea might have to increase the value of the won, putting the government in a dilemma. The newly-elected U.S. President Donald Trump, during his first term, had already designated China as a currency manipulator and strongly pressured South Korea to improve transparency in its foreign exchange market. This highlights the complex situation South Korea is facing.
The U.S. Treasury Department’s semi-annual report to Congress on the “Macroeconomic and Foreign Exchange Policies of Major Trading Partners” named seven countries, including China, Japan, South Korea, Singapore, Taiwan, Vietnam, and Germany, as currency watch list countries. South Korea had been removed from this list in November of last year, after first being placed on it in April 2016.
Under the Trade Facilitation and Trade Enforcement Act of 2015, the U.S. assesses the macroeconomic and currency policies of the top 20 trading partners and classifies them as either being eligible for an in-depth analysis or as watch list countries if they meet certain criteria. The criteria include: a trade surplus of over $15 billion with the U.S.; a current account surplus equivalent to 3% or more of GDP; and net purchases of foreign currency amounting to 2% or more of GDP over 12 months, during at least 8 months. Meeting all three criteria leads to an in-depth analysis, while meeting two results in being placed on the watch list.
Previously, South Korea met only the trade surplus criterion, but in this report, its current account surplus also became a concern. As of the end of June 2024, South Korea’s annual current account surplus was 3.7% of GDP, a significant increase from 0.2% the previous year. This was largely due to strong external demand for Korea’s tech products, leading to a rise in the goods surplus. South Korea’s trade surplus with the U.S. increased from $38 billion the previous year to $50 billion. In response, the Korean government intervened in the foreign exchange market, selling $9 billion (0.5% of GDP) from July last year to June this year to limit the devaluation of the won. Although this was aimed at controlling the depreciation, the U.S. Treasury pointed out that South Korea’s market intervention itself was an issue. They advised South Korea to limit foreign exchange interventions to disorderly market conditions only.