Now, the world is in a currency war. In the old days, the knife and gun were used in a war, but these days it is money that many countries use as a weapon. In other words, a nation that has a strong economic power is a powerful country. Then, let’s figure out why the currency war has broken out and what the impact of this war is on the Korean economy.
The development of the currency war
After the subprime mortgage crisis in 2007, the U.S. faced a longterm recession. With the impact of the economic crisis, Americans began to close their wallets and corporations reduced their investments. As a result of this, the recession became worse and worse. The U.S. judges that a slowdown in the economic recovery is because of the fact that Chinese goods are sold in the market at a relatively low price compared to the U.S. products. As a result, the U.S. government tries to depreciate the value of the dollar to the appreciation of Chinese yuan to recover the economy by issuing dollars more, which is called the quantitative easing policy.
This policy can bring a lot of benefits to the developed countries like the U.S. or those in the EU. On the other hand, developing countries like China or Korea in which the exports occupy a large amount of the economic activity should suffer a great deficit. China is showing high economic growth rates regardless of global recession with the price competitiveness. But when the value of the Chinese yuan goes up, many Chinese companies will lose their competitiveness in exports, and it will make many jobless people. Therefore, the Chinese government has been bristling at the U.S. pressure to raise the yuan’s value and tries to keep its value stable to protect its domestic market.
The problem is that the effect of the currency war between the U.S. and China is not their own problem. The increased amount of dollars is moving toward the rising countries which have a lot of economic potential, such as Korea, Australia, Brazil, and so on. Stock prices of these countries will increase by the capital, but when the capital goes out abruptly with the changing global situation, they are compelled to experience the economic crisis caused by inflation.
The effect on the Korean economy
Then, what is the effect of depreciation of the dollar on the commodity market? First, as all the prices of the oducts are set by the dollar, if the value of the dollar goes down, the cost will go up. In brief, we have to pay more money to buy the same goods than we did before. Second, alternative investment - investing in gold, property, or raw materials - will increase. Investors can expect more profits by choosing alternative investments than through dollar investment because of the weak dollar. Korea, like China, is in the black in trade with the U.S., so we are also under pressure to appreciate of Korean won implicitly.
As the Korean economy is largely dependent on exports, it is sensitive to the fluctuation of the exchange rate. If the value of the Korean won increases, the profit from imports will increase while the profit from exports will decrease relatively. Large corporations have economic base and infrastructure well, so they don’t suffer greatly from the strengthening won in the short-term. But small and medium-sized businesses should have a hard time from it. Small and medium-sized businesses occupy ninety-nine percent of the whole Korean economy, and eighty-eight percent of the workers in the labor market are in those businesses.
Thus, the appreciation of the won can be a burden to many small businesses, and it will cause a significant increase in the unemployment rate, which can be a big problem in the Korean economy.
As mentioned above, depreciation of the dollar can bring about an increase in the prices of products. As a result, the increase in the value of real assets such as produce and raw materials can lead to inflation. As business ethics are not mature in the Korean economy yet, the price increase can be done easily and all we can see is the temporary discount to ease complaints. The effect of the economy on our lives is significant. Eating, dressing, and even leeping are all related to economic activity. Therefore, as the impact of currency war on our economy is large and can bring about a serious crisis like the past economic crises, we should keep an eye on the world economic trends and Korea’s response to them.