Explainer: Why South Korea cannot make the same US trade deal as Japan

SEOUL – South Korea’s negotiations with the US on a trade deal to lower tariffs have stalled amid concerns over the foreign exchange implications of a US$350 billion (S$448 billion) investment fund, part of an agreement reached with US President Donald Trump in July.

What has Japan agreed to?

South Korean officials, who had argued that the package would mostly comprise loans and guarantees with limited direct investment, said last week they could not accept terms similar to those of a US$550 billion investment package finalised in September by Japan.

Tokyo agreed to transfer money within 45 days after the US selects a project, and that available free cash flows from investments would be split evenly until they reached an allocated amount, after which 90 per cent would go to the US.

US Commerce Secretary Howard Lutnick said on Sept 11 that there would be no flexibility for Seoul. “The Japanese signed the contract. The Koreans either accept that deal or pay the tariffs. Black and white, pay the tariffs or accept the deal.”

How is South Korea’s situation different from Japan’s?

Since South Korea’s deal was announced in late July, there have been concerns among market participants that the resulting dollar demand will overwhelm the domestic currency market, depressing the won.

Since suffering traumatic capital flight during a financial crisis in the late 1990s, South Korea has retained a tight grip on its currency market. It started opening it to foreigners in 2024, but there is still no offshore market to trade the won.

The daily average global won trade stood at US$142 billion in 2022, compared with US$1.25 trillion for the Japanese yen, according to a triennial survey by the Bank for International Settlements. The won accounted for 2 per cent of global market share, against 17 per cent for the yen.

Why is South Korea particularly worried?

The won hit a 15-year low at the end of 2024 at around 1,476 to the dollar and now stands around 1,390.

Market participants say the US$40 billion needed by the state pension fund every year for its overseas investments is already a heavy burden on the currency. Citi estimated that the investment package would generate dollar demand of around US$100 billion each year from 2026 to 2028.

South Korea’s economy is much smaller than Japan’s. It had a current account surplus of US$99 billion in 2024, compared with Japan’s surplus of nearly US$200 billion, and central bank foreign reserves of US$416 billion in August, compared with Japan’s US$1.3 trillion.

How is South Korea trying to mitigate the impact?

The idea of seeking a foreign exchange swap line with the US was raised publicly by Presidential Policy Secretary Kim Yong-beom last week, when he said the yen’s status as a key international currency and an unlimited swap line between Japan and the US put Tokyo in a stronger position.

Finance Minister Koo said last week there would be an announcement on foreign currency when tariff negotiations conclude, and he told Reuters on Sept 15 that he thought the US would “contemplate” a currency swap line, after a local media outlet said the government had passed the request to the US.

Which countries have FX swap lines with the US?

The US Federal Reserve has standing swap line arrangements with the central banks of Canada, Britain, Japan, the European Union and Switzerland.

It established temporary swap lines of US$60 billion each with the Bank of Korea and eight other central banks in March 2020 during the Covid-19 pandemic.

After the swap line expired in December 2021, the Fed offered the Bank of Korea a safety net of US$60 billion through repurchase agreements, enabling it to borrow dollars with its holdings of US Treasuries as collateral. REUTERS