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[INTERVIEW] Currency war to disrupt Korean economy

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School
Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School
This is the fourth in a series of interviews with global economists to see how the ongoing trade disputes will unfold and to analyze their implications for the Korean economy ― ED.

US expert advises Seoul to mull measures against capital flight

By Park Jae-hyuk

The trade dispute between the United States and China, which has escalated into a "currency war," will pose a serious threat to Korea's export-reliant economy, according to an international management professor at the University of Pennsylvania's Wharton School.

He stressed that the Korean government should be aware that a currency war will cause a major disruption for the global economy, which will, in turn, deal a blow to the Korean economy and financial markets.

"A currency war is easy to start, much easier than a tariff war. It's a very dangerous thing," Mauro F. Guillen, a Spanish-American economist who serves as the director of the Lauder Institute at the school, told The Korea Times

In Guillen's view, the tension between the world's two largest economies is highly expected to affect Korea's trade and economic growth, because Korea's exports of intermediary goods to China may decrease following the reduced exports of made-in-China goods to the U.S.

He believes the possible slowdown in GDP growth of the U.S. and China will likely affect Korea as well, considering that the U.S. and China are major importers of Asia's fourth-largest economy.

"Slower Chinese and U.S. growth will reduce global growth and hence Korean growth," he said.

"Anything that disrupts trade in the world also disrupts Korea. The problem is that the economy is very dependent on trade, and the volatility with currencies is really bad. Korean companies will find it difficult to plan and to make investments for the long run."

Guillen's comments came after the U.S. Treasury Department labeled the world's most populous country as a currency manipulator on Aug. 5, accusing the Chinese government of intentionally keeping its currency weak.

That day, Beijing allegedly allowed its yuan to fall to its lowest level in 11 years ― 7 per U.S. dollar ― in an apparent response to Washington's additional tariffs.

Three days later, China's central bank even set the official reference rate for its currency at 7.0039 yuan per dollar.

Regarding any foreign capital outflow from Korea, however, Guillen, the author of "The Limits of Convergence," a book regarding globalization and organizational changes in Korea, Spain and Argentina, took a cautious stance.

Guillen said he is not sure the weaker won ― which was led by the depreciation of the Chinese yuan ― will mean capital outflows.

"I expect Korean equities and bonds to be attractive," he said.

The Korean won has tended to move in the same direction as the Chinese yuan, and the depreciation of the Korean won has been considered to cause the outflow of foreign capital from Korea.

Although Guillen's view was contrary to the common belief, he agreed that the Korean government and central bank need to take measures to prevent a possible capital outflow.

"The Bank of Korea (BOK) will need to be very careful about monetary policy to avoid unwanted capital outflows," he said.

It is known that emerging markets need to keep their key interest rates higher than developed countries, so as to attract foreign capital and avoid its outflow.

Guillen also suggested the Korean government encourage inflows through selective tax cuts.

To overcome the current crisis, he emphasized cooperation among the international community.

"I think we need a G5 ― the U.S., Eurozone, China, Japan and Britain ― to sit down and negotiate. They should come to an agreement as to currency markets and also hopefully trade," he said.

As for Korea, he advises the country to "be a constructive partner with both Japan and the U.S., and to help reach agreements with China."


Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School
Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School
This is the fourth in a series of interviews with global economists to see how the ongoing trade disputes will unfold and to analyze their implications for the Korean economy ― ED.

US expert advises Seoul to mull measures against capital flight

By Park Jae-hyuk

The trade dispute between the United States and China, which has escalated into a "currency war," will pose a serious threat to Korea's export-reliant economy, according to an international management professor at the University of Pennsylvania's Wharton School.

He stressed that the Korean government should be aware that a currency war will cause a major disruption for the global economy, which will, in turn, deal a blow to the Korean economy and financial markets.

"A currency war is easy to start, much easier than a tariff war. It's a very dangerous thing," Mauro F. Guillen, a Spanish-American economist who serves as the director of the Lauder Institute at the school, told The Korea Times

In Guillen's view, the tension between the world's two largest economies is highly expected to affect Korea's trade and economic growth, because Korea's exports of intermediary goods to China may decrease following the reduced exports of made-in-China goods to the U.S.

He believes the possible slowdown in GDP growth of the U.S. and China will likely affect Korea as well, considering that the U.S. and China are major importers of Asia's fourth-largest economy.

"Slower Chinese and U.S. growth will reduce global growth and hence Korean growth," he said.

"Anything that disrupts trade in the world also disrupts Korea. The problem is that the economy is very dependent on trade, and the volatility with currencies is really bad. Korean companies will find it difficult to plan and to make investments for the long run."

Guillen's comments came after the U.S. Treasury Department labeled the world's most populous country as a currency manipulator on Aug. 5, accusing the Chinese government of intentionally keeping its currency weak.

That day, Beijing allegedly allowed its yuan to fall to its lowest level in 11 years ― 7 per U.S. dollar ― in an apparent response to Washington's additional tariffs.

Three days later, China's central bank even set the official reference rate for its currency at 7.0039 yuan per dollar.

Regarding any foreign capital outflow from Korea, however, Guillen, the author of "The Limits of Convergence," a book regarding globalization and organizational changes in Korea, Spain and Argentina, took a cautious stance.

Guillen said he is not sure the weaker won ― which was led by the depreciation of the Chinese yuan ― will mean capital outflows.

"I expect Korean equities and bonds to be attractive," he said.

The Korean won has tended to move in the same direction as the Chinese yuan, and the depreciation of the Korean won has been considered to cause the outflow of foreign capital from Korea.

Although Guillen's view was contrary to the common belief, he agreed that the Korean government and central bank need to take measures to prevent a possible capital outflow.

"The Bank of Korea (BOK) will need to be very careful about monetary policy to avoid unwanted capital outflows," he said.

It is known that emerging markets need to keep their key interest rates higher than developed countries, so as to attract foreign capital and avoid its outflow.

Guillen also suggested the Korean government encourage inflows through selective tax cuts.

To overcome the current crisis, he emphasized cooperation among the international community.

"I think we need a G5 ― the U.S., Eurozone, China, Japan and Britain ― to sit down and negotiate. They should come to an agreement as to currency markets and also hopefully trade," he said.

As for Korea, he advises the country to "be a constructive partner with both Japan and the U.S., and to help reach agreements with China."


Park Jae-hyuk pjh@koreatimes.co.kr


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