South Korea and the United States have hit a stalemate in tariff talks over the implementation of a $350 billion U.S. investment fund agreed by the two countries. Amid the deadlock, Seoul reportedly asked Washington for an “unlimited currency swap” before the fund is established. The government sees the swap as a necessary safety net to prevent shocks to the foreign exchange market if dollars flow out for U.S. investments.
A currency swap is an agreement between two central banks allowing each to deposit its own currency and borrow the other country’s currency at a predetermined exchange rate in emergencies. An unlimited swap would effectively give South Korea a “dollar overdraft account” without a ceiling. The two countries previously entered temporary currency swaps during the 2008 global financial crisis and the 2020 COVID-19 pandemic.
If 84 percent of South Korea’s foreign reserves were invested in the United States during President Donald Trump’s term, the country could face severe pressure on its foreign currency liquidity. The won could depreciate sharply, sending the won-dollar exchange rate higher, import prices could rise, and domestic purchasing power could decline, potentially jolting the economy. The won-dollar rate hovering between 1,380 and 1,390 in Seoul’s foreign exchange market, despite South Korea’s stock market repeatedly hitting record highs and a surge in foreign investment, reflects these preemptive concerns.
Securing an unlimited currency swap with the United States is not easy. All countries with standing unlimited swaps, including Japan, the eurozone, the United Kingdom, Canada, and Switzerland, are quasi-reserve currency nations. Still, considering the massive investment scale that could shock South Korea’s economy in the short term and the U.S.-biased profit-sharing structure, Seoul’s request for a swap cannot be dismissed as unreasonable.
Starting today, Japan’s U.S. tariff rate will be 10 percentage points lower than South Korea’s, which is expected to hurt Korean exporters. At the same time, South Korea cannot accept a $350 billion investment agreement without any safeguards that could jeopardize the national economy. The investment period should be adjusted to a realistic and reasonable level, and investment targets should be set to maximize synergy through participation by Korean companies, such as in the MASGA project. The government must also spare no effort to secure concessions from the United States on the currency swap issue.
