🚨 Final Tariff Deal Negotiations Before APEC
Today Korean Economic News for Beginners | 2025.10.08
0️⃣ $350 Billion Investment Package, Minimizing Foreign Exchange Market Impact is Key
📌 Coordinating Implementation Methods for Korea-US Tariff Agreement, Currency Swap and Phased Execution are Core Issues
💬 South Korea and the US are conducting final coordination on implementing the details of the mutual 15% tariff and Korea's $350 billion US investment package agreed upon in July. Minister of Trade, Industry and Energy Kim Jung-kwan stated after his US visit that they "confirmed a consensus on foreign exchange market sensitivity," but further discussions are needed on specific investment methods and timelines. The key issue is how and how quickly to execute the $350 billion. While the US wants implementation as soon as possible, Korea is concerned that spending cash all at once could shock the won-dollar exchange rate due to its foreign exchange reserve structure. Instead of lump-sum cash payments, various mixed approaches are being considered, including bond purchases, equity investments, loan guarantees, and Special Purpose Vehicles (SPVs). Additionally, a temporary currency swap agreement, like those in 2008 and 2020, is being discussed as a stabilizing measure for the foreign exchange market. While the goal is to finalize by the November APEC Summit, disagreements over detailed conditions remain, making the negotiation outcome a focus of attention.
1️⃣ Easy to Understand
South Korea and the US are making final adjustments on how to implement the tariff agreement they reached in July. The key question is: how, when, and in what way will Korea invest the promised $350 billion (about 470 trillion won) in the United States?
Let me first briefly summarize the July agreement. After the Trump administration announced it would impose 25% tariffs on all countries, Korea and the US negotiated and agreed to lower it to a mutual 15%. In exchange, Korea promised to invest $350 billion in the US over the next 5 years. This will take various forms, including semiconductor factory construction, advanced technology investments, and infrastructure development.
The problem is how to execute this money. The US wants the investment to happen as quickly and reliably as possible. But Korea must be careful. To understand why, we need to know about Korea's "foreign exchange reserves" structure.
Foreign exchange reserves are the foreign money (mainly dollars) and equivalent assets that a country holds. As of September 2025, Korea's foreign exchange reserves are about $420 billion. That sounds like a lot, but only about 20% of this is "deposits" that can be used as cash immediately. Most of the rest is tied up in "securities" like US Treasury bonds.
What would happen if Korea spent $350 billion in cash all at once? It would need to sell a large amount of its securities (US Treasury bonds, etc.). This would cause two problems.
First, the exchange rate could skyrocket. If Korea uses a large amount of dollars, the supply of dollars in the foreign exchange market decreases, and the value of the dollar rises compared to the won. In other words, the exchange rate surges. When the exchange rate rises, import prices go up and inflationary pressure increases.
Second, it could also affect interest rates. If Korea sells a large amount of US Treasury bonds it holds, bond prices fall and interest rates can rise. This would burden the US economy and could increase volatility in global financial markets.
For these reasons, the Korean government is considering mixing several methods rather than making a lump-sum cash payment.
The first method is purchasing bonds. Maintaining or additionally purchasing US Treasury bonds that Korea already holds is also a form of investment. It has the effect of providing funds to the US government without cash expenditure.
The second is loans and guarantees. Public financial institutions like the Korea Export-Import Bank or Korea Development Bank can provide loans or guarantees to Korean companies investing in the US. Japan's $450 billion US investment package announced in 2017 consisted largely of this approach.
The third is establishing a Special Purpose Vehicle (SPV). The government and private sector create an investment fund together to invest in US infrastructure or advanced industries. If the government contributes partially and attracts private funds, it can reduce foreign exchange shock while increasing investment scale.
The fourth is phased execution. Execute over 5 years, starting with a small scale initially and gradually increasing. This gives the foreign exchange market time to absorb the shock.
In addition, a "currency swap" agreement is being discussed. A currency swap is an agreement where two countries' central banks exchange each other's currencies to supply liquidity. If the Bank of Korea and the US Federal Reserve establish a swap, Korea can borrow dollars when needed, which has the effect of calming foreign exchange market instability.
Looking at past cases, during the 2008 global financial crisis, Korea and the US established a temporary $30 billion swap, and during the 2020 COVID-19 crisis, they concluded a $60 billion swap. In both cases, they didn't actually use much, but just the reassurance that "dollars are available if needed" prevented exchange rate surges.
However, the US only maintains permanent unlimited swaps with five countries: the Eurozone, UK, Canada, Japan, and Switzerland. With Korea, a temporary swap with limits, like in the past, is more realistic.
Meanwhile, tariffs remain a variable. Recently, consumer prices for some items in the US, such as audio equipment and clothing, have started to rise. Initially, importers absorbed the tariff burden, but as inventory runs low, it's being passed on to consumer prices. This is called "tariff pass-through," and the pass-through rate increases over time, potentially increasing the burden on US consumers.
Ultimately, the key is "how, how quickly, and in what container to put the money." The US wants quick implementation, but Korea wants to approach carefully while minimizing foreign exchange market shock. Whether they can find common ground before the November APEC Summit is worth watching.
2️⃣ Economic Terms
📕 Foreign Exchange Reserves
Foreign exchange reserves are a country's external payment capacity assets, mainly composed of securities like US Treasury bonds, deposits, SDR, gold, etc.
- As of September 2025, Korea's foreign exchange reserves are about $420 billion, ranking 9th in the world.
- The speed of converting to cash and market impact differ depending on composition ratio, with most held in securities form.
- When large cash expenditure is needed, securities must be sold, which can affect exchange rates and interest rates.
📕 Currency Swap
A currency swap is an agreement where two countries' central banks exchange each other's currencies to supply liquidity.
- It's divided into permanent unlimited swaps and temporary limited swaps, with the US maintaining permanent swaps with only 5 countries.
- Korea has twice concluded temporary swaps: 2008 ($30 billion) and 2020 ($60 billion).
- The psychological stabilizing effect is often greater than actual usage, with the reassurance "it's available if needed."
📕 Tariff Pass-Through
Tariff pass-through is when tariffs paid by importers or distributors are reflected in consumer prices over time.
- Initially, companies absorb tariffs by reducing profits, but price increases follow as inventory depletes.
- Recent price increases in US audio equipment, clothing, etc. are examples of tariff pass-through.
- The pass-through rate increases over time, potentially increasing consumer burden and inflationary pressure.
📕 Special Purpose Vehicle (SPV)
A Special Purpose Vehicle (SPV) is a separate entity or fund created for a specific project or investment.
- Created through joint investment by government and private sector, it has the effect of dispersing risk and attracting private funds.
- It has the advantage of reducing foreign exchange shock by increasing investment scale without direct cash expenditure.
- It's frequently used for large-scale infrastructure investments or participation in overseas projects.
3️⃣ Principles and Economic Outlook
✅ Large-Scale Foreign Investment and Exchange Rate Volatility
Let's analyze how foreign exchange reserve structure and investment methods affect exchange rates.
First, the composition of foreign exchange reserves determines liquidity. About 80% of Korea's $420 billion foreign exchange reserves are in securities form (mainly US Treasury bonds). The rest includes deposits (20%), SDR, gold, etc. Since securities must be sold in the market to convert to cash, large-scale sales can cause price declines and interest rate increases. For example, if Korea sells $100 billion worth of US Treasury bonds in a short period, bond prices fall and yields (interest rates) rise, burdening US financial markets.
Second, cash spending creates upward pressure on exchange rates. To invest $350 billion in the US, Korea needs to convert won to dollars. If dollar demand in the foreign exchange market surges during this process, dollar value rises and won value falls. In other words, the exchange rate spikes. If the exchange rate rises from 1,300 won to 1,400 won, import prices increase and inflationary pressure grows. There's also concern that foreign investors might exit from won assets.
Third, phased execution and mixed methods cushion the shock. Looking at Japan's case, the $450 billion US investment package announced in 2017 consisted mainly of loans and guarantees from public financial institutions rather than cash spending. This way, investment effects can be achieved without directly using government foreign exchange reserves. Also, if executed gradually over 5 years, dispersing 70 billion dollars annually gives the foreign exchange market time to absorb the shock.
Careful execution planning considering foreign exchange reserve structure is key to exchange rate stability.
✅ Safety Net Effect of Currency Swaps
Let's examine the mechanism by which temporary currency swaps contribute to foreign exchange market stability.
First, swaps are insurance against dollar liquidity shortages. If large-scale investment increases dollar demand, dollar shortage can occur in the foreign exchange market. When a currency swap exists, the Bank of Korea can borrow dollars from the US Fed when needed. Both the 2008 $30 billion and 2020 $60 billion swaps were only partially used, but their mere existence had the effect of calming market instability.
Second, the credit effect prevents exchange rate surges. When investors believe "Korea can borrow from the US even if dollars run short," they refrain from unnecessary dollar purchases. This acts as a psychological safety net preventing exchange rate spikes. In fact, during the March 2020 COVID-19 shock, the exchange rate surged from the 1,200 won range to 1,280 won, but quickly stabilized after the Korea-US swap announcement.
Third, temporary swaps are a realistic alternative. The US only maintains permanent unlimited swaps with the Eurozone, UK, Canada, Japan, and Switzerland. These are all G7 countries or reserve currency holders. Korea is likely to conclude a temporary swap with limits and a 3-year maturity, as in the past. This alone would greatly help stabilize the foreign exchange market during the $350 billion investment period.
Temporary swaps have a greater psychological stabilizing effect than actual usage and are an essential safety device for large-scale investments.
✅ Time Lag Effect of Tariffs and Prices
Let's analyze the process and time lag of how tariff imposition is passed through to consumer prices.
First, companies initially absorb tariffs. When tariffs are imposed, importers or distributors initially postpone price increases as much as possible by reducing profits. In competitive markets, raising prices reduces sales volume. So immediately after tariff imposition, there seems to be little change in consumer prices.
Second, pass-through rates increase after inventory depletion. Over time, as existing inventory runs out and newly imported products begin selling, prices rise reflecting tariffs. Recent consumer price increases in US audio equipment, clothing, footwear, etc. are evidence of this pass-through process. Generally, 3-6 months after tariff imposition, pass-through rates reach 50-70%.
Third, long-term inflationary pressure increases. When import prices rise due to tariff pass-through, domestically produced goods also have room to raise prices. Additionally, wage increase demands can grow, leading to cost-push inflation. The Trump administration underestimated tariffs' impact on prices, but in reality, consumer burden is growing, which could become a political burden.
Tariff pass-through to prices appears with a time lag and is a factor that increases inflationary pressure in the long run.
✅ Negotiation Strategy and Future Outlook
Let's analyze the future direction of Korea-US negotiations and the interests of both countries.
First, the US wants visible results. The Trump administration wants to promote its agreement with Korea externally ahead of the November APEC Summit. "Korea agreed to invest $350 billion" becomes evidence that Trump's tariff policy is effective. Therefore, it will want an agreement containing specific investment plans and timelines.
Second, Korea seeks to secure flexibility. The Korean government faces a dilemma of minimizing foreign exchange market shock while meeting US demands. Therefore, it will try to mix various methods like loans, guarantees, and SPVs, and secure phased execution schedules. It will also try to include currency swap conclusion in the package deal to establish a foreign exchange safety net.
Third, a compromise point will likely be found in the middle. An approach where Korea focuses on bond purchases and loans/guarantees for the first 1-2 years, then increases private investment from year 3 to meet the overall scale is likely. Additionally, if a temporary swap (e.g., 3-year maturity $500-600 billion) is concluded in parallel, it will be a result satisfying both sides. However, negotiations may continue until just before APEC as last-minute tug-of-war over detailed conditions could persist.
A compromise reflecting both countries' interests in a balanced way is expected to be reached before the November summit.
4️⃣ In Conclusion
Implementing the details of the Korea-US tariff negotiation is not simply a matter of how quickly to give money, but a complex process of maintaining foreign exchange market stability while coordinating both countries' interests.
The key issue is how to execute the $350 billion. Due to Korea's foreign exchange reserve structure, lump-sum cash payment risks causing exchange rate surges and interest rate fluctuations. Therefore, it's reasonable to mix various methods including bond purchases, loans/guarantees, and SPV establishment, and execute gradually over 5 years.
Currency swap conclusion is also an important safety device. Like the 2008 and 2020 cases, even a temporary swap has a credit effect that calms foreign exchange market instability. Rather than actual usage amount, the psychological reassurance that "it's available if needed" plays a role in preventing exchange rate surges.
Meanwhile, tariffs beginning to pass through to US consumer prices could also affect negotiations. While companies initially absorbed them, price increases appearing after inventory depletion could increase political pressure within the US. This could give room for the Trump administration to reconsider tariff policy or take a more flexible attitude toward allies like Korea.
Leading up to the November APEC Summit, both countries will conduct last-minute coordination to find a compromise. Korea seeks to minimize foreign exchange shock and secure flexibility in execution schedules, while the US wants visible results and early implementation. The most realistic agreement would focus on bonds and loans initially, increase private investment in the latter half, and conclude a temporary swap in parallel.
Ultimately, the success of these negotiations depends on how well they balance speed and safety. Sophisticated design is needed that meets US expectations without undermining market confidence, and this will be an important test of Korea's economic diplomacy capabilities.
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