🚨 US Investment Limit Set
Today Korean Economic News for Beginners | 2025.11.18
0️⃣ Foreign Exchange Market Stability Priority, Adjusted to $20 Billion Annually
📌 US Investment Limit Set... Preventing Foreign Exchange Market Impact, Negotiation That "Avoided Failing Grade"
💬 The government specified a condition in the Memorandum of Understanding (MOU) and joint fact sheet with the US that allows reducing investment if the investment scale affects the foreign exchange market. This negotiation, adjusted to about $20 billion annually, shows that the government prioritized foreign exchange market stability. As a result that reflects concerns about foreign exchange reserve depletion and exchange rate surge, it secured flexibility to adjust investment scale when market conditions are unstable. However, the minister in charge expressed regret by describing the negotiation result as "avoided failing grade," and experts point out that the impact on domestic industries during actual investment execution remains the next challenge.
1️⃣ Easy Understanding
The Korean government promised large-scale investment to the US, while creating safeguards to prevent too much money from flowing out at once. The content is about investing $20 billion annually, about 28 trillion won in Korean currency, but being able to adjust according to foreign exchange market conditions.
Let's first look at why this agreement was needed. Recently, the US and Korea conducted various negotiations on trade and investment. The US requested more investment from Korea, and Korea had to promise investment to avoid disadvantages like tariff increases.
But there was a big problem here. What would happen if we invested tens of billions of dollars in the US all at once? A huge amount of dollars would flow out of Korea. This causes three problems.
First, foreign exchange reserves decrease. Foreign exchange reserves are foreign currency assets like dollars or gold that a country holds for emergencies. It's similar to keeping emergency funds in a household. Korea has a painful memory of having to apply for IMF bailout in 1997 when foreign exchange reserves hit rock bottom. That's why managing foreign exchange reserves is very important.
Second, the exchange rate can surge. When large amounts of dollars flow out, dollar demand surges in the market and the won's value falls. This means an exchange rate increase. As we saw in previous news, with the won-dollar exchange rate already exceeding 1,450 won causing various problems, if the exchange rate rises further due to large-scale investment, import prices will surge and hit ordinary people's economy hard.
Third, domestic investment shrinks. When more money goes overseas, Korean companies have less funds to invest. This can lead to job losses and economic growth slowdown.
Let's take an example. Say Mr. A's family has a monthly income of 5 million won. But suddenly they have to send 2 million won monthly to relatives? They must cover living expenses, children's education costs, and savings with the remaining 3 million won. Naturally, the household finances will struggle and future investments will decrease. The national economy is the same.
The government recognized this problem and prepared several safeguards in negotiations with the US. The most important are 'investment limit setting' and 'flexible adjustment clause.'
What is investment limit setting? Instead of investing a large amount at once, it means dividing and investing $20 billion annually. It's similar to making installment payments instead of paying off a large debt at once. This reduces the shock to the foreign exchange market at any specific time.
For example, imagine investing $100 billion all at once. The foreign exchange market would fall into great chaos. But if you divide this over 5 years, investing $20 billion each year? The market gains time to absorb the shock.
What is the flexible adjustment clause? If foreign exchange market conditions worsen, it means we can reduce the promised investment amount. For example, if the exchange rate surges or foreign exchange reserves fall to dangerous levels, that year's investment can be less than $20 billion.
This is a very important safeguard. International economic situations are hard to predict. A global financial crisis could suddenly occur, or crises in other countries could drive investors to the safe asset of dollars. In such situations, trying to keep promises forcefully could put our economy at risk. The flexible adjustment clause acts as a shield protecting our economy in such situations.
There's another important content. The 'commercial rationality' clause. This means investing only in businesses that can actually make profits, not simply for political purposes. In other words, we won't pour money anywhere just because the US government requests it, but will invest only where there's investment value.
For example, if we invest in advanced US semiconductor factories, our companies can learn technology and earn profits in the future. But if asked to invest in unprofitable businesses, we can refuse. This is a mechanism to prevent wasting taxpayer money.
But why did the minister describe it as "avoided failing grade"? This means the negotiation result isn't perfect. We couldn't completely reject US demands, but we didn't get everything we wanted either. In exam terms, it means we scored about 60 points to avoid failing, but it's not a high score.
Actually, there are several disappointing points. First, there are criticisms that $20 billion annually is still burdensome. They say it will be covered by foreign exchange operation profits, but as we saw in other news, those profits don't come out stably every year. Second, there are concerns that mechanisms for domestic companies to participate preferentially aren't sufficient. Third, it's uncertain whether such large-scale investment will really help our economy.
Ultimately, this negotiation is a "second-best option." It's not the best, but it's evaluated as avoiding the worst situation. We couldn't completely ignore US pressure, but we couldn't put our economy at risk either, so it's a compromise that emerged.
2️⃣ Economic Terms
📕 Foreign Exchange Market
The foreign exchange market is where currencies of different countries are traded.
- It's where exchange rates are determined, affecting export-import companies' price competitiveness and the overall national economy.
- When the foreign exchange market is unstable, exchange rates fluctuate sharply, directly affecting prices and corporate management.
- Governments and central banks sometimes intervene to stabilize the foreign exchange market.
📕 Foreign Exchange Reserves
Foreign exchange reserves are foreign currency assets like dollars, gold, and foreign bonds that a country holds.
- They act as "emergency funds" needed for international transaction settlements or during foreign exchange crises.
- Korea holds about $420 billion in foreign exchange reserves, ranking 9th globally.
- Sufficient foreign exchange reserves gain investors' trust and maintain financial stability.
📕 Commercial Rationality
Commercial rationality is a standard that judges whether an investment or business can create economic benefits.
- It's a condition that there must be actual profitability, not political purposes or diplomatic pressure.
- The commercial rationality clause in this US investment is a safeguard to prevent wasting taxpayer money.
- It means we won't invest in businesses that don't make profits, serving as an important judgment criterion in negotiations.
📕 Memorandum of Understanding (MOU)
An MOU is a document organizing cooperation items between countries or organizations, with weak legal binding but having the character of political promise.
- MOUs generally don't need parliamentary ratification, but can be controversial when there's large fiscal burden.
- This US investment MOU contains conditional investment promises considering foreign exchange market impact.
- Written together with a fact sheet to clarify understanding and promises between both countries.
3️⃣ Principles and Economic Outlook
✅ Mechanisms of Capital Outflow and Exchange Rate Fluctuation
When large-scale capital flows overseas in a short period, it can seriously shock the foreign exchange market and macroeconomy.
First, capital outflow creates upward pressure on exchange rates. Investing $20 billion in the US means converting that much won into dollars. When dollar demand surges in the foreign exchange market, the dollar price (exchange rate) rises. With the current won-dollar exchange rate exceeding 1,450 won, additional capital outflow could push the exchange rate beyond 1,500 won. When exchange rates rise, import prices increase, and especially for Korea which depends on imports for energy and raw materials, this leads to overall price increases. Ordinary people's living costs increase and companies face higher cost burdens.
Second, decreased foreign exchange reserves affect national credit ratings. Large-scale investment can reduce the Bank of Korea's foreign exchange reserves. Foreign exchange reserves are the nation's "emergency fund," used for stabilization during financial crises or foreign exchange market emergencies. During the 1997 foreign exchange crisis, Korea's foreign exchange reserves fell to $3.9 billion, requiring IMF bailout. Although we currently hold $420 billion, if this decreases rapidly, international credit rating agencies could lower Korea's credit rating. Lower credit ratings mean paying higher interest when borrowing overseas, and foreign investors avoiding Korean assets could trigger additional capital outflow.
Third, decreased domestic liquidity can shrink financial markets. When large funds go overseas, circulating money domestically decreases. This makes fund-raising difficult for companies, leading to investment and employment contraction. Small and medium enterprises especially can face greater fund-raising difficulties. Historically, countries experiencing rapid capital outflow mostly experienced economic recession.
The government's setting of investment limits and preparing flexible adjustment clauses is a defensive strategy to mitigate these risks.
✅ Effects of Limit Setting and Distributed Investment
Dividing large-scale investment over several years is a smart strategy that cushions shock.
First, it gives markets time to absorb shock. If we invested $100 billion at once, the foreign exchange market would fall into great chaos. But dividing this over 5 years with $20 billion annually allows markets to adapt gradually. For example, we can cover part with dollars earned by export companies and foreign exchange operation profits, reducing the amount purely flowing out from foreign exchange reserves. Also, market participants gain predictability, preventing unnecessary currency speculation.
Second, it secures room to respond to economic situation changes. During the 5-year period, global economic conditions can change greatly. The US economy could fall into recession, interest rates could change sharply, or crises could occur in other regions. With room to adjust annual investment scale, we can respond flexibly to situations. For example, one year we might invest $25 billion when economic conditions are good, and the next year only $15 billion when conditions worsen.
Third, it can enhance investment efficiency. Rushing to invest large amounts increases the likelihood of not finding proper projects and wasting money. But taking time to invest step-by-step allows selecting good projects with commercial rationality. We can find and invest in projects in US advanced industries, infrastructure, and energy sectors that actually make profits and help Korean companies. This can become investment that gains economic benefits, beyond simply keeping political promises.
Limit setting isn't simple number adjustment, but a strategy pursuing both risk management and investment efficiency.
✅ Domestic Industrial Competitiveness and Investment Priorities
As US investment increases, maintaining and strengthening domestic industrial competitiveness becomes more important.
First, we must maximize domestic companies' participation opportunities. Just because $20 billion is invested in the US doesn't mean all that money only goes to US companies. Korean companies can participate by building factories in the US, investing in technology development, or partnering with local companies. Actually, Samsung Electronics, Hyundai Motor, and LG Energy Solution are already conducting large-scale investments in the US. The government should support these companies' investments and help small and medium enterprises advance together. This way, it's not just money going out, but an opportunity for our companies to enter the US market and acquire technology.
Second, we mustn't neglect domestic investment. Even as overseas investment increases, domestic investment shouldn't decrease. As we saw in other news, with Korea's productivity slowing, domestic companies' innovation and investment are more important. We should actually increase domestic investment in future industries like AI, semiconductors, bio, and batteries. The government must implement sophisticated policies balancing US investment and domestic investment. For example, we can strengthen domestic investment incentives through tax benefits or R&D support.
Third, we must restructure industries from a long-term perspective. Rather than simply investing to meet US demands, we should invest in directions that enhance Korea's long-term economic competitiveness. For example, while investing in US advanced semiconductor factories, we should simultaneously develop next-generation semiconductor technology domestically. A two-track strategy pursuing both US market entry and domestic technology development is needed. We should also diversify industries into new fields like energy, bio, and aerospace.
US investment is unavoidable reality, but wisdom is needed to transform this into an opportunity to enhance our industrial competitiveness.
4️⃣ Conclusion
This US investment negotiation shows the "wisdom of second-best options." It's not an ideal result, but the product of efforts to avoid the worst and find the best within realistic constraints.
The annual investment scale of $20 billion is by no means small. However, dividing large amounts over several years instead of investing at once, and preparing safeguards to adjust according to foreign exchange market conditions, was a wise choice. Also, through the commercial rationality clause, ensuring investment occurs only in projects that can actually make profits, not just political promises, is positive.
However, as the expression "avoided failing grade" shows, it wasn't a perfect negotiation. We couldn't completely avoid US pressure, and it's true there's burden on the domestic economy. Especially decreased foreign exchange reserves and upward exchange rate pressure are risk factors that need continuous monitoring.
For young professionals or financial beginners, this case provides several important lessons.
First, international economics doesn't move solely by pure economic logic. Politics, diplomacy, and security are all intertwined. Korea investing in the US isn't simply for profits, but a strategic choice to maintain the Korea-US alliance and avoid trade friction.
Second, risk management is important. When making big decisions, we must always prepare for worst-case scenarios. The government's setting of investment limits and preparing flexible adjustment clauses is part of such risk management. The same applies to personal investment. Rather than investing all money in one place, diversifying investment and leaving reserve funds to respond to situation changes is important.
Third, long-term perspective is needed. Don't just look at immediate losses or burdens, but think about what long-term benefits there will be. While US investment is burdensome short-term, it could become an opportunity for Korean companies to enter the US market and acquire technology.
At the individual level, we should prepare for exchange rate fluctuations. As large-scale capital movement could destabilize exchange rates, if you're planning overseas travel or study abroad, carefully watch exchange rate trends. Also, holding some dollar deposits or dollar assets is a way to reduce exchange rate risk.
Companies must thoroughly establish currency hedging strategies. As exchange rate volatility could increase, they should actively utilize hedging tools like forward exchange transactions or currency swaps. Companies with high import dependency especially need cost management prepared for exchange rate increases.
The government must remember this negotiation is not the end but the beginning. Protecting domestic industries during actual investment execution, enhancing investment efficiency, and stably managing the foreign exchange market are upcoming tasks. They should also work harder on domestic investment and industrial competitiveness strengthening.
Ultimately, this US investment negotiation shows the reality Korea faces within the global economic order. We carry the difficult task of protecting national interests, managing risks, and seeking long-term opportunities under superpower pressure. There's no perfect answer, but making the best results through wise choices is what we can do.
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