South Korea: On Free-Trade Agreement And Won

by Marc Chandler

At the end of last week, the US and Korea appeared to reach the basis of agreement that will also resuscitate the moribund free-trade effort. In essence it appears that slowing down the liberalization in the auto sector and pork was what broke the log jam.

The US tariff on Korean auto will end in five years rather than immediately or in three years as earlier drafts suggested. Korea’s 8% tariff on US auto imports will be cut to 4% immediately instead of being eliminated entirely. The US will maintain its 25% tariff on truck imports for 8 years instead of beginning to phase them out immediately. In addition, each US auto makers can send to South Korea 25k cars a year that meet US safety standards and would be exempt from separate South Korea standards.

The US conceded that Korea can keep its 25% pork tariffs 2-years long than 2014, as the initial drafts proposed. While South Korean farmers seem happy, the auto sector seems less so and the free trade agreement will face parliamentary opposition, but will likely pass. It will likely pass in the US, though the political allies of the beef farmers may be a bit disappointed of no fresh agreement on beef, only pork.

Separately, Korea reported foreign purchases of its securities for last month. There was a sharp slowdown in foreign purchases. KRW1.72 trillion (~$1.5 bln) of equities was purchased vs KRW5.12 trillion in Oct. Foreigners purchased KRW1.07 trillion vs KRW4.34 trillion in Oct. These foreign holdings of Korean bonds stands at a record KRW80.11 trillion at the end of Nov, which is still a lowly 7.2% of the outstanding bonds.

Of particular interest to many investors is the role of China. Chinese investors bought a net KRW556 bln , the second highest monthly purchase in two years. Chinese investors are the fourth largest portfolio investor in SKorea. While Chinese investment flows into Korea are significant for Korea, they aren’t for China. Given its massive reserve holdings, Korea accounts for less than 0.25% of China’s reserves.

The flare up of tensions with North Korea probably did not have much impact on the monthly report and as scary NKorea’s provocation is, we were persuaded that it had more to do with the internal transition of power. The US dollar has pulled back about 3.5% since the spike on Nov 24–from KRW1172.50 to KRW1131.20 today. Look for the dollar to find support in front of KRW1128 near-term.