A bold investment-and-tariff deal between the United States and South Korea, announced during President Donald Trump’s visit to Seoul, is raising deep concerns about capital outflows from South Korea and the consequent weakening of the Korean won. While the agreement offers South Korean exporters potential tariff relief, the underlying requirement to send large sums of cash abroad to cover investment commitments may spark sustained currency pressure—in effect threatening the won’s stability and exposing vulnerabilities in the nation’s foreign exchange position.

Capital Outflows and Currency Dynamics

Under the agreement, South Korea committed to a US $350 billion investment programme in the U.S., in return for the U.S. lowering tariffs on South Korean autos and auto parts from 25 % to 15 %. Of the total investment, US $200 billion is to be paid in cash instalments (capped at US $20 billion per annum), and US $150 billion is to go into shipbuilding cooperation. This structure was explicitly designed to soften the immediate burden on the won by spreading payments. However, even a US $20 billion annual outflow represents significant dollar demand from South Korea’s economy—leading to upward pressure on the US dollar and downward pressure on the won.

In practical terms, when South Korean investors or government-linked entities must convert won into dollars to fund these overseas investment commitments, the won weakens. A weaker won makes imported goods and dollar-denominated debt more expensive, reducing purchasing power and increasing the cost of servicing foreign obligations. Analysts estimate that if outflows continue steadily over multiple years, the won could slip toward ₩1,450 per dollar, a level that would exceed the threshold witnessed during past episodes of currency stress.

Moreover, South Korea’s economy is export- and technology-centric, dependent on stable currency conditions. If capital leaves and the won weakens, the domestic liquidity pool is reduced—even as exporters may earn dollars that are not converted back into won. This dynamic further exacerbates the currency weakness. The recent agreement therefore, while beneficial in trade terms, introduces a new channel of stress: currency flight driven by structural outflows rather than short-term speculative attacks.

Why the Trade Deal Ties into Currency Pressures

The linkage between a trade-and-investment pact and currency movement may not be immediately obvious, but the mechanism is straightforward. South Korea is committing to send large sums of dollars abroad (via the investment pledge) and is expected to convert significant assets into foreign currency. That creates two related effects: increased dollar demand and reduced won supply in domestic markets.

First, to fund the US $200 billion cash component, South Korean entities must acquire US dollars, reducing supply of dollars in the domestic foreign-exchange market and raising demand for the dollar. As demand for the dollar increases, its value rises relative to the won, meaning the won falls. Second, South Korean corporations and pension funds are already buying more overseas assets, meaning they convert won into foreign currencies, reducing domestic won liquidity. Because the won is less globally liquid and more tightly managed than major currencies like the euro or yen, the outflow of capital creates greater instability.

While South Korea secured a cap of US $20 billion per year in instalments to moderate the effect, the longer-term nature of the outflows remains a risk. Even US $20 billion annually—in a country where the won/dollar turnover is tightly monitored—can accumulate into serious downward pressure over time. Analysts note that if export earnings are not fully converted back into won, and if investment outflows persist, the net effect is a steady weakening of the won, beyond short-term volatility. In short: trade-deal anchored investment commitments are feeding into currency flight risk.

Historical Precedents and Institutional Constraints

South Korea’s sensitivity to currency fluctuations is grounded in history. The Asian Financial Crisis of 1997-98 looms large in policy circles: the won collapsed to more than 1,700 per dollar after years of liberalisation, exposing the economy to capital-flight risk and triggering a domestic stimulus of reforms. In response, the Bank of Korea and the government imposed tight controls and monitoring frameworks to prevent a repeat of that kind of shock. The current context reflects that vigilance.

However, the won is not as freely traded as other major currencies. Foreign banks must often access the won market through two designated Korean brokerages, limiting offshore liquidity and making the currency more vulnerable to domestic flows. The agreement’s requirement for converting large sums into dollars therefore carries outsized potential impact. Furthermore, while the deal includes safeguards—such as the yearly US $20 billion cap—those measures may buy time rather than eliminate structural pressure. The fact that South Korean investors and the national pension fund are already increasing overseas asset purchases deepens the exposure.

Market Reaction and Future Risks

In the immediate aftermath of the deal announcement, the won briefly gained value, as markets welcomed the tariff relief. But by early trading following the news, the currency had weakened, trading near ₩1,428 per dollar and continuing its downward trajectory. Analysts argue that while the trade deal offers long-run benefits for exports and tariffs, the real test will be how South Korea manages the currency implications.

Should South Korean companies avoid converting export proceeds into won (for example, keeping profits abroad) or should investment outflows intensify, downward pressure could persist for months or years. Some market participants have projected the won could slip toward 1,450–1,460 per dollar. That level may trigger central-bank intervention or policy changes, but it also increases import cost and inflation risk, which could dampen domestic consumption and growth.

In addition, the negotiation context remains fluid. While details have emerged, some parts of the funding and investment structure still require finalisation. If deadlines slip or disbursements accelerate unexpectedly, the currency could face sudden shocks. The risk of “currency flight” is not just theoretical—it rests on actual commitment of funds and conversion choices.

Strategic Trade-Offs for South Korea

For South Korea, the trade deal offers clear competitive advantages: lower tariffs on vehicles and parts compared to what would have been 25 % duty; enhanced market access; and encouragement for U.S. investment in Korean firms. The country’s auto, shipbuilding and chip sectors stand to benefit. For example, the auto duty cut to 15 % improves Korean OEM competitiveness vs Japanese or European rivals—which may support exports and corporate earnings.

Yet the strategic cost is significant. Committing large amounts of foreign assets—or diverting export-dollar flows into overseas investment—shifts the balance from domestic reinvestment to external obligations. The authorities will need to ensure that export proceeds are repatriated, foreign-currency liabilities are managed and that the Bank of Korea retains enough reserves and tools to stabilise the won. The interplay between trade policy, investment commitments and currency management has become more visible.

Experience suggests that currency flight risks build gradually, yet can accelerate if sentiment shifts. Key indicators for South Korea include: the rate of conversion of export dollars into won; the actual outflows via the US investment commitments; portfolio flows of domestic institutions into foreign assets; changes in foreign-exchange reserves; and shifts in external debt or obligations denominated in foreign currencies.

Should the won weaken meaningfully, the Bank of Korea may need to intervene via foreign-exchange swaps or raising interest rates—two moves that carry domestic trade-offs, particularly as inflation and growth remain concerns. Korea may also seek a swap line with the U.S. Federal Reserve to ease dollar liquidity pressure—a route Japan has previously used—but such arrangements typically come with conditions.

Ultimately, the deal illustrates that trade agreements today are no longer just about goods and tariffs—they also implicate cross-border capital flows and currency stability. For South Korea, sending dollars abroad may deliver export access, but it also creates external pressures that must be managed carefully.

By committing to large-scale investment abroad in return for trade advantages, South Korea has accepted a trade-off: short-term tariff relief in exchange for long-term currency exposure. How well the won holds up—and how authorities manage the inevitable dollar flows—will determine whether the deal proves a strategic win or a heavy burden for the economy.

(Adapted from Reuters.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy