Exports Boost Korea’s Currency

A weak currency and trade deficits have been common for decades in South Korea, but the country may be entering a new era.

The Korean won, worth about an eighth of its value in the mid-1960s, when the South Korean economy began to come alive, is beginning to appreciate.

The rise started after a meeting Aug. 8 in Washington between David Mulford, an assistant secretary of the Treasury, and Kim Kyung Won, the ambassador from South Korea. An announcement in Washington said the purpose of the meeting was “to discuss the won-dollar relationship.” But officials in Seoul promptly declared that the exchange rate would “not be a subject for diplomatic negotiations.”

The Mulford-Kim meeting was the first sign that Washington regarded the won as undervalued. The U.S. government has focused its efforts on lowering the value of the dollar against the currencies of Japan and Western Europe.

Officially, the Bank of Korea calculates the won’s value against what it calls a basket of foreign currencies, including the dollar. Market forces, the bank says, determine the won’s worth. Yet the won has remained fairly stable despite the turmoil of exchange rate fluctuations touched off a year ago by a meeting in New York of the finance ministers of the United States, Britain, West Germany France and Japan, and despite South Korea’s trade surplus.

1.8% Appreciation

When the New York meeting took place, the won-dollar exchange rate was 892.20 to 1. By early this week, the rate was 876.20 to 1, a gain of 1.8%. Nearly half of this has come in the past two months.

More is expected. Deputy Prime Minister Kim Mahn Je has said he expects the won to gain 4% to 5% in value by the end of the year. Market forces, he said, will reflect South Korea’s current-account surplus of about $2.5 billion for 1986.

For the first eight months of the year, the current-account surplus was $1.75 billion. This measure includes both trade and such non-trade transactions as shipping and tourist spending.

U.S. officials say the appreciation of the won is a significant development. But a far greater appreciation will be necessary to counter Korea’s trade surplus with the United States, which is growing even faster, in percentage terms, than Japan’s.

This year, South Korea’s surplus with the United States is expected to increase by 46%, to about $7 billion from $4.8 billion, compared to 20% for Japan’s surplus, to $60 billion from $50 billion.

Also, the volume of Japanese exports to the United States is declining, while that of South Korea is expanding. The rising U.S. trade deficit with Japan is due largely to the higher prices that the Japanese are charging to offset the decline in the dollar’s value against the yen.

Windfall for Korean Manufacturers

A 60% appreciation of the Japanese yen since last September has meant a windfall for Korean manufacturers, who as a result have been given a competitive edge over the Japanese in the American market.

The one hitch for the Koreans has been the fact that they rely on key components from Japan to produce much of what they sell to the United States--microwave ovens, videocassette recorders, passenger cars. Accordingly, their deficit with Japan is expected to double this year to $6 billion, and this will inflate to some extent the prices on Korean goods in the United States.

Hyundai Motor Co. recently announced the first price increases for its cars in the U.S. market, but it attributed the increase to higher quality.

The won-dollar exchange rate also is beginning to make itself felt in Japan. Earlier this year, Japan’s prime minister, Yasuhiro Nakasone, complained that the yen’s appreciation was sapping Japan’s ability to export and shifting the source of American imports to South Korea and Taiwan from Japan without reducing the U.S. deficit. Taiwan’s currency also has remained relatively stable until recently.

Growing competition from Korea now is being cited by Japanese car makers as justification for ending Japan’s voluntary restraints on exports to the United States. The restraints, which now limit Japanese exports to 2.3 million units a year, are scheduled to end next March 31.