The political economy of the won: U.S. - Korean bilateral negotiations on exchange rates

This paper traces the development of U.S.-Korean negotiations on exchange rates in the second half of the 1980s. Background on Korea's foreign exchange control system is provided, including the evolution of its exchange rate determination mechanisms from 1945 to the current period. The U.S. Congress' rationale for including exchange rates in the Omnibus Trade and Competitiveness Act, the U.S. Treasury's Reports to Congress, and the results of the U.S. Treasury's negotiations with Korea on exchange rate \"manipulation\" are examined. ; Korea's current account surpluses emerged at a time when the United States was experiencing record current account deficits, in part due to the rapid appreciation of the dollar in the first half of the 1980s. The fact that the dollar subsequently depreciated against the United. States' industrial-country trading partners but moved little against the currencies of the NIEs prompted the U.S. Congress to examine the exchange rate policies of those economies. Under the Omnibus Trade and Competitiveness Act, Korea and Taiwan were cited in 1988 as \"manipulating\" their currencies for \"unfair\" trade gain. With the implementation of the market average-rate system in March 1990, Korea was removed from Treasury's list of exchange rate manipulators. However, the Treasury has complained that even though Korea does not directly manipulate the won within the meaning of the Exchange Rates Act, pervasive capital controls limit potential exchange rate movements and may be used to \"manipulate\" the value of the won indirectly.