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A second Plaza Agreement is coming

Feb 09,2017
The trade protectionism of the Trump administration is created by American people’s antagonism. They cannot understand the reality where no jobs are added and wages don’t go up. They think it is politicians’ lie that they can buy good products at lower price thanks to free trade. So Trump’s argument sounds sweet: When a tariff is imposed on Korean and Chinese goods and Mexican immigrants are prevented from coming, American goods will sell and Americans can work. They have no doubt that companies would come back if the increased tax revenue from tariffs and more jobs and the savings from shifting defense expenses to Korea are invested on infrastructure and companies get tax cut.

Korea is not the only country seeing a major trade surplus. China and Germany are also in the black. They don’t want to fight against the United States, have sizable domestic markets and can protect themselves. Germany uses the euro, so it is hard to blame the exchange rate as the cause of the trade surplus. China pleases the United States by revaluing the Chinese yuan from time to time.

Trump’s trade protectionism seems to target countries that have considerable economies and seem to benefit from free trade agreement with the United States. Mexico is the first target, and Korea may be the next. Both Korea and Mexico are under the umbrella of U.S. dollars. Mexico is in agreement with the International Monetary Fund that is similar to a currency swap of $85 billion. If the United States exercises influence, it is likely to be suspended. Korea is practically in America’s hand. The United States demanded Mexico to pay for the construction of the $15 billion border wall. It is unfathomable how much the United States would bill Korea.

The Plaza Agreement, which the Reagan Administration initiated to resolve twin deficits, took over Japan like a tsunami. The exchange rate of the yen to U.S. dollar fluctuated from 238 yen to 152 yen in a year. It was a prelude for the burst of Japanese economic bubble, the lost two decades.

It is frightening that Trump’s demand may sweep up Korean economy like the Plaza Agreement. A tariff hike does not have the comprehensive impact that the exchange rate has. So, Washington is now demanding increased share in defense cost. Tariff increases would hinder Korean product’s price competitiveness and worsen the economic slump. Korea is faced with population, export, investment and class mobility cliff and trapped in labor, productivity, welfare and household dept. Korea may soon have zero visibility. The United States, being an ally, it is unlikely, but just like Japan in 1985, it won’t take much time for tsunami to sweep up Korea.