🚨 Korea-US $350B Deal at Final Stage
Today Korean Economic News for Beginners | 2025.10.18
0️⃣ 'Cash Minimization' and 'Currency Swap' Are Key Issues
📌 Balancing FX Market Stability vs US Demands…Target Agreement Before APEC
💬 South Korea and the United States are in final negotiations to complete a $350 billion (about 470 trillion won) investment deal. The main issues are minimizing cash investment ratios and whether a currency swap can be established. The US wants as much cash investment as possible, but Korea worries about the impact large cash outflows would have on its foreign exchange market. Both sides are discussing converting some investment into loans or guarantees, and strengthening cooperation in strategic industries like nuclear power, energy, and semiconductors. A currency swap agreement would help stabilize Korea's foreign exchange market and is an important variable in the negotiations. Both countries plan to continue intensive negotiations through the weekend, aiming for an agreement before next week's APEC summit.
1️⃣ Easy Explanation
Korea and the US are negotiating a huge investment of 470 trillion won. The important issue is not just how much money, but how the money will be invested. Korea wants to protect its foreign exchange market while also getting real economic benefits.
Let me explain why these negotiations are important. $350 billion is about the same as Korea's annual national budget - it's a huge amount of money. The US wants large investments from Korea to build infrastructure and create jobs in America. Korea wants to use this investment to strengthen economic cooperation with the US and gain advantages in key industries like semiconductors, nuclear power, and batteries.
The problem is the investment method. The US wants as much "cash investment" as possible. Cash investment means Korean companies or the government send dollars directly to the US to build factories or buy stocks. But if hundreds of billions of dollars leave Korea in a short time, it could shock the foreign exchange market.
Let me give you an example. Imagine Korean companies suddenly sell 50 billion dollars worth of won and buy dollars to send to America. Then demand for dollars increases sharply in the foreign exchange market, and the supply of won increases too much. This can make the exchange rate jump. When the exchange rate goes up, import prices rise, creating inflation pressure. Companies with lots of foreign debt face bigger burdens.
So Korean negotiators want to reduce cash investment and convert some of it into "loans" or "guarantees." Loans mean Korea lends money to US projects. Guarantees mean when US companies borrow money from somewhere else, Korea backs up the loan. This way, large amounts of money don't leave all at once, reducing the shock to the foreign exchange market.
Another key issue is "currency swap." A currency swap is a system where two countries can exchange their currencies within certain limits. For example, if Korea suddenly needs dollars, it can borrow dollars from the US using won as collateral. This acts as a safety net to prevent the exchange rate from jumping during financial crises.
Korea wants to establish a currency swap with this negotiation. This is because the Korea-US currency swap was very helpful during the 2008 global financial crisis. At that time, the won-dollar exchange rate shot up to 1,600 won, but after the currency swap was established, it stabilized at around 1,200 won.
However, from the US perspective, a currency swap might look like a "gift" to Korea, so they might not agree easily. The US Treasury supports currency swaps through the Exchange Stabilization Fund (ESF), which can be decided by discretion without congressional approval. So political judgment is an important variable.
Investment sectors are also important negotiation topics. Korea wants to focus investment on areas where Korean companies are competitive, like nuclear power, renewable energy, semiconductors, and batteries. This way, instead of just giving money, Korean companies can strengthen their position in the US market and make long-term profits.
In the end, this negotiation isn't just about how much to invest, but how to invest in a way that minimizes burden on Korea's economy while maximizing real benefits.
2️⃣ Economic Terms
📕 Currency Swap
A currency swap is an agreement where two countries' central banks can exchange their currencies within certain limits.
- When dollars are scarce, won can be used as collateral to borrow dollars from the US, helping stabilize the foreign exchange market.
- The Korea-US currency swap played a crucial role in stabilizing the exchange rate during the 2008 financial crisis.
- Currency swaps symbolize financial trust between countries and act as a safety net during crises.
📕 Equity Investment
Equity investment is buying a company's stock to acquire part of its ownership.
- If the company grows, you can earn profits through dividends or stock price increases, but there's also risk of loss.
- Large equity investments have the advantage of gaining influence over that company or industry.
- In these negotiations, Korea is considering equity investments in US high-tech companies.
📕 Exchange Stabilization Fund (ESF)
The Exchange Stabilization Fund is money set aside for the government to intervene in the market when the foreign exchange market becomes unstable due to exchange rate changes.
- The US Treasury operates it and can use it for currency swaps by discretion without congressional approval.
- When the exchange rate jumps, it supplies dollars, or conversely, when the exchange rate drops sharply, it buys dollars to stabilize the market.
- It's also used as a funding source for currency swaps to support allied countries' financial stability.
📕 Commercial Rationality
Commercial rationality is the principle that investment decisions should be based on economic profitability and efficiency, not political considerations.
- If investment money is used for inefficient projects for political purposes, the risk of loss increases.
- Korea wants to clarify investment selection rights and profit distribution structure to ensure commercial rationality.
- This is an important mechanism to protect taxpayer money and pension funds from waste.
3️⃣ Principles and Economic Outlook
✅ The Need to Minimize Cash Investment
Let's look at the shock large cash investments could have on Korea's foreign exchange market and how to reduce it.
First, buying large amounts of dollars in a short time can cause the exchange rate to jump. If Korean companies need to buy hundreds of billions of dollars all at once, demand for dollars surges in the foreign exchange market, and the won-dollar exchange rate can rise sharply. For example, if the current exchange rate is 1,300 won per dollar, and suddenly 50 billion dollars worth of buy orders come in, it could jump above 1,400 won. Rising exchange rates lead to higher import prices, stimulating inflation, and increase the burden on companies with lots of foreign debt. We must remember that during the 2008 financial crisis, the won-dollar exchange rate shot up to 1,600 won, causing difficulties for many companies.
Second, decreased foreign exchange reserves can lower international credibility. If large dollar outflows occur, the Bank of Korea's foreign exchange reserves could decrease. Foreign exchange reserves show a country's ability to pay foreign debts, and if they decrease, Korea's credit rating in international financial markets can fall. If the credit rating falls, the Korean government or companies have to pay higher interest when borrowing money abroad, and foreign investors might sell Korean assets and leave. Therefore, maintaining foreign exchange market stability is directly connected to the credibility of the entire national economy.
Third, converting to loans and guarantees can spread out the shock. Instead of cash investment, providing loans means money doesn't leave all at once but is paid step by step as the project progresses. Also, guarantees only provide credit without actual money leaving, so there's almost no impact on the foreign exchange market. For example, if investing $10 billion in a US nuclear power project, it could be structured as $3 billion in cash, $4 billion in long-term loans, and $3 billion in guarantees. This way, the burden on the foreign exchange market is greatly reduced while still meeting US investment demands.
Minimizing cash investment isn't just about saving money - it's a core strategy to protect foreign exchange market stability and national credit ratings.
✅ The Strategic Value of Currency Swaps
Let's analyze specifically how important currency swaps are as a safety device for Korea's economy.
First, currency swaps act as a last line of defense during financial crises. It's easy to understand if we think about the 2008 global financial crisis. At that time, global financial markets froze, making it extremely difficult to get dollars, and the won-dollar exchange rate shot up to 1,600 won. Many Korean companies fell into crisis because they couldn't repay dollar debts. When the Korea-US currency swap was established, the Bank of Korea could borrow dollars from the US when needed, and the exchange rate quickly stabilized at around 1,200 won. Like this, currency swaps give a clear signal to the market during crisis situations, calming panic.
Second, currency swaps symbolize financial trust between countries. Establishing a currency swap means the US recognizes Korea as a "trustworthy partner." Currently, countries with unlimited currency swaps with the US are very few - Europe, Japan, Canada, the UK, and Switzerland. If Korea secures a currency swap in these negotiations, Korea's financial status would rise greatly and trust in international financial markets would strengthen. Long-term, this positively affects attracting foreign investment and reducing borrowing costs.
Third, currency swaps work regardless of actual use. An interesting point is that currency swaps work just by existing. Market participants feel reassured just by knowing "Korea can get dollars whenever needed." Therefore, the possibility of the exchange rate jumping decreases, and the market stays stable even without actually using the currency swap. After 2008, the Korea-US currency swap ended in 2010, but it was rarely actually used during that period. However, its mere existence greatly contributed to market stability.
Currency swaps aren't just a tool to borrow dollars - they're strategic assets that raise a country's financial safety net and international status.
✅ Commercial Rationality of Investment Structure
Let's look at what conditions are needed for this investment to create real economic benefits rather than political waste.
First, investment selection rights must be secured. Most important is that Korea should be able to decide where this huge amount of 470 trillion won will be spent. If the US unilaterally designates politically necessary projects and Korea just provides money, this can lead to waste unrelated to profitability. For example, if asked to invest tens of billions of dollars in renovating old coal-fired power plants in the US midwest, this would be unprofitable and environmentally problematic from Korea's perspective. Therefore, Korea must be able to selectively invest in areas where Korean companies are competitive, like nuclear power, renewable energy, semiconductors, and batteries.
Second, profit distribution structure must be clarified. If an invested project succeeds and makes profits, how those profits will be divided must be agreed in advance. If Korea provides most of the funds but only gets a small portion of the profits, this is an unfair deal. For example, if Korea invests 70% in a project to build a semiconductor factory in Texas, it should be reasonable to get at least 50% of the profits. Also, if participating as equity investment to exercise some management rights, that's even better. This way, instead of just lending money, you can share real profits as a business partner.
Third, protection mechanisms for public funds like the National Pension are needed. This investment likely includes public funds like the National Pension or Korea Development Bank. Since this money comes from people's retirement funds or taxes, it must be managed even more carefully. Therefore, thorough business feasibility reviews before investment are necessary, and independence must be guaranteed to boldly refuse if loss risks are high. Also after investment, performance must be regularly checked, and if problems arise, mechanisms to quickly withdraw must be in place. We must learn from cases in the early 2000s when Korean companies invested excessively in Middle East construction projects and suffered big losses.
Large-scale investments without commercial rationality eventually become a burden on the people, so clarifying investment conditions is the core of negotiations.
✅ Scenarios Based on Negotiation Results
Let's analyze by scenario the impact on Korea's economy depending on how negotiations conclude.
First, the best scenario is achieving both reduced cash investment and establishing a currency swap. If cash ratio is lowered to 30-40% of total investment, the rest structured as loans and guarantees, and simultaneously establishing a Korea-US currency swap, this is the optimal result for Korea. Foreign exchange market shock is minimized while economic cooperation with the US is strengthened, and financial stability is secured through the currency swap. In this case, the won-dollar exchange rate maintains stability, Korean companies expand their position in the US market, and Korea's status in international financial markets rises.
Second, a second-best scenario is high cash ratio but securing a currency swap. If the US demands 50-60% cash investment ratio and Korea accepts it but definitely secures currency swap establishment, this is also not a bad result. There would be short-term exchange rate pressure from cash outflows, but with a currency swap, sharp exchange rate instability can be prevented. Also, if investment concentrates on strategic industries like nuclear power or semiconductors, long-term benefits for Korean companies are possible. However, exchange rate volatility might increase during the first few months of investment, so the government must implement foreign exchange market stabilization measures.
Third, the worst scenario is high cash ratio without securing a currency swap. If the US demands over 60% cash investment and doesn't provide a currency swap, this is a very unfavorable negotiation for Korea. In this case, there's high risk of exchange rate jumps from large dollar outflows, and as foreign exchange reserves decrease, international credibility could fall. Also, if investment selection rights are limited, it could result in just pouring money into low-profitability projects. In this situation, it might be better to break off negotiations and pursue renegotiation. Short-term, there would be tension in Korea-US relations, but long-term, it could be a choice that protects national interests.
Negotiation results will be a critical turning point determining Korea's economic stability and growth potential for years to come.
4️⃣ In Conclusion
The Korea-US $350 billion investment negotiation isn't just about money amounts - it's a critical negotiation involving Korea's foreign exchange market stability and long-term growth strategy. Minimizing cash investment ratios and securing a currency swap should be Korea's core goals.
The biggest issue in these negotiations is the investment method. The US wants as much cash as possible, but Korea worries about the shock large dollar outflows would have on the foreign exchange market. If hundreds of billions of dollars leave in a short time, a vicious cycle of exchange rate jumps, decreased foreign exchange reserves, and falling international credibility could start. Therefore, converting some investment into loans or guarantees to spread out the burden on the foreign exchange market is essential.
Securing a currency swap is another core of these negotiations. Considering the experience of the Korea-US currency swap playing a crucial role in exchange rate stability during the 2008 financial crisis, establishing a currency swap along with this large investment is a very reasonable request. Currency swaps give markets a sense of stability regardless of actual use and raise Korea's international financial status.
Securing commercial rationality shouldn't be overlooked. The huge amount of 470 trillion won shouldn't be wasted on inefficient projects due to political considerations. Investment selection rights, profit distribution structure, and public fund protection mechanisms must be clarified to protect taxpayer money and pensions. Korean companies should selectively invest in areas where they're competitive, like nuclear power, semiconductors, batteries, and renewable energy, and fairly receive profits.
Korea's economy could change greatly depending on negotiation results. The best scenario is lowering cash investment to 30-40% level and securing a currency swap. In this case, foreign exchange market stability can be maintained while strategic cooperation with the US is strengthened. Conversely, if cash ratio is high and there's no currency swap, the worst situation of exchange rate instability and falling international credibility could be faced.
Attention is focused on what results weekend negotiations ahead of the APEC summit will produce. Rather than rushing to accept unfavorable conditions for short-term results, strategic judgment prioritizing long-term national interests is needed. If necessary, delaying or readjusting negotiations should be considered.
In the end, success of these negotiations depends not on 'how much to invest' but 'how to invest to secure both foreign exchange market stability and real benefits.' The Korean government faces the difficult task of balancing US demands and domestic economic stability, but if negotiating with clear principles, results beneficial to both countries can be created.
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