South Korea Faces Stalled U.S. Trade Talks Amid Currency Concerns

South Korea’s negotiations with the United States over a new trade deal have hit a roadblock as officials resist terms tied to a $350 billion investment package. The dispute arises after Japan finalized a $550 billion deal with Washington in August, agreeing to transfer funds within 45 days of project selection and split cash flows evenly with the U.S. until allocations were met, after which America would receive 90%.

U.S. Commerce Secretary Howard Lutnick stated there would be “no flexibility” for Seoul, insisting South Korea accept Japan’s terms or face tariffs. However, South Korea argues its economic and currency situation differs significantly from Japan’s. Unlike the yen, the won lacks a deep global market. Average daily global trade in the won stood at $142 billion in 2022, far below the yen’s $1.25 trillion. The won accounts for just 2% of global market share, compared to the yen’s 17%.

The Korean won, which hit a 15-year low at 1,476 per dollar last year, remains vulnerable. Analysts warn that the annual $40 billion demand from the state pension fund for overseas investments already weighs heavily on the currency. Citi estimates the proposed investment deal could create an additional $100 billion in yearly dollar demand between 2026 and 2028.

South Korea’s smaller economy, with a current account surplus of $99 billion and $416 billion in reserves, contrasts sharply with Japan’s $200 billion surplus and $1.3 trillion in reserves. To mitigate risks, Seoul is considering a U.S. foreign exchange swap line, similar to Japan’s unlimited arrangement. The Bank of Korea previously held a $60 billion temporary swap line with the Federal Reserve during the COVID-19 crisis, which expired in 2021.

The outcome of these negotiations will be crucial for South Korea’s trade future and currency stability.