Photographer: SeongJoon Cho/Bloomberg

Trump Gripes Miss Root Cause of Korean Surplus, Analysts Say

Updated on
  • Current-account surplus amounted to 7% of Korean GDP in 2016
  • Local researchers see aging as key to surplus trend in Korea

As South Korea worries that U.S. criticism of its current-account surplus could spill over into foreign-exchange policy, researchers in Seoul say the imbalance has more to do with demographics than gaming the won.

It’s wrong to assume that a stronger Korean currency would significantly reduce the surplus, according to a paper from Korea University economists Shin Kwan-ho and Han Chi-rok. They estimate that a 10 percent appreciation of the won would trim just 0.8 percentage point from the surplus.

The key, say Shin and Han, is a large cohort of middle-age workers who can expect to live much longer than previous generations and need to save hard right now for their retirement. In the decades ahead, these same people will be spenders and their impact in pushing up the surplus will fade.

Korea was listed on the Treasury Department’s currency watch list in October, along with China, Japan, Germany, Taiwan, and Switzerland, because it met two of the three criteria used to monitor currency practices: a current-account surplus over 3 percent of gross domestic product, and a bilateral trade surplus of more than $20 billion.

Treasury’s first currency review under Donald Trump’s administration is expected in April. While Trump hasn’t singled Korea out for attention on currency specifically, he has attacked the free trade pact between the two nations as a job killer that blew out the bilateral trade deficit.

Demographics are also contributors to surpluses for other countries including Japan, Germany, and Italy, according to Shin and Han.

To be sure, Korea’s surplus is also a consequence of the multitude of cars, electronic gadgets and other goods it sells to the U.S., and a weaker won makes these more competitive.

It also should be noted that Korea’s current-account surplus in 2016 was about 7 percent of GDP, higher than the ratios for China and Japan, whose currency practices have been criticized by Trump.

The won has advanced more than 6 percent this year, following a 9 percent drop over the previous two years.

Korea’s trade surplus with the U.S. was $23 billion last year while its current-account surplus reached $98.7 billion, data from the government and the central bank data show.

The third criteria Treasury uses to gauge currency manipulation is whether a country engages in persistent, one-sided intervention.

Korean authorities maintain that they only intervene in the market to help ease sharp volatility. Finance Minister Yoo Il-ho repeated this stance on Tuesday, telling lawmakers that the government only intervenes when there is rapid volatility, and that it is considering various measures to increase imports of U.S. manufacturing goods.

Government officials take every opportunity to explain to U.S. counterparts that the surpluses are driven by demographics and other factors like oil prices, said a Korean finance ministry official, who declined to be named as he isn’t authorized to speak publicly on the matter.

Even today’s youth are preparing for longer lives and saving more for retirement, said Jung Kyu-chul, a research fellow at the state-run Korea Development Institute in Sejong. "Adjusting the foreign-exchange rate doesn’t help much in reducing the current-account surplus,” said Jung.