South Korea’s export boost and its exchange rate

In my previous blog post South Korean Exchange Rate, I analyzed how South Korean exchange rate fluctuated over last few years and affected my “college life”. I decided to come to US when Korean Won-US dollar exchange rate was around 900Won per dollar in 2008, but decided to go back to Korea to fulfill military service for two years when exchange rate rose to over 1532.8 Won per dollar in early 2009. My parents had to send 77million Won instead of 45million Won per year to pay my tuition, and I thought it was a good time to fulfill military service in Korea and wait for won-dollar exchange rate to settle down.

Nonetheless, it was a good decision. The exchange rate settled down to around 1100 won per dollar by the time I got discharged from Korean army and returned to University of Michigan. As shown in the graph from FRED below, won-dollar exchange rate fall to 1035.4 won per dollar this April. It is the lowest since August 2008, yet IMF believes South Korea won is still undervalued. According to the Wall Street Journal Article IMF Says South Korea Won Undervalued, South Korea’s won currency could be up to 8% undervalued and urged authorities to refrain from intervening in currency markets.

exchange rate

In particular, US treasury this week called on South Korea to limit its interventions in foreign exchange markets, as it believes that South Korea currency is unfairly cheap, making US exports more costly by comparison. However, the main reason for United States’ trade deficit with Korea is due to its free trade agreement. According to the news article from New Hampshire Business Review The U.S. should think twice about yet another free trade deal, United States’ trade deficit with Korea has increased $8.7 billion or 59.6%, costing nearly 600,000 U.S jobs after the FTA was established. Furthermore, the graph below which shows value of total exported goods exported by Korea tells us that Korea’s export has no strong correlation; when Korean won was weakest (year 2009), the quantity of export is lower then what the quantity of export in year 2014, when Korean won is relatively stronger.

export value

 

Although it is true that weaker currency can help a country to boost its trade surplus, I do not think that Korea’s recent trade boost is due to its “weak” currency. From the two graphs we can see that Korea’s currency has been appreciating since year 2009, yet its export quantity has been increasing as well. I may be biased (as I am Korean), but I think it is bit harsh for IMF to tell Korea to stop intervening in its currency saying Korea’s export boost is due to its weak currency. Korean companies have been producing fine products, from electronics to cars, and I think this is the main reason for the boost in export; not weak currency.

3 thoughts on “South Korea’s export boost and its exchange rate

  1. gaochen

    Interesting post. There is also a trade deficit with China. I just wonder if the deficit also cause trade conflict with Korea.

  2. wyna

    I agree with you that Korea’s true competitive edge lies in its ability to produce value goods, but I feel like exchange rate is still a big player. Although it had experienced super high speed growth in the past, and show promising signs, financial sector (albeit heavily regulated) is still a key player in Korea’s economy. Think back to 1996 where Korea was sacked, and Lone Star Bank acquisition of Korea Exchange Bank in 2003.

    With that being said, yes I think Korea’s value added items are core of its exports and in the bigger picture for the entire economy. I wrote a similar post on it if you are interested.

  3. dslavin

    I would have to agree with wyna. Although the quality of Korean goods has definitely been increasing over the past ten years (just look at Kia cars, which now compete with Japanese cars in both price and quality), the exchange rate plays a role as well.

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