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Letter to Secretary Geithner and Ambassador Kirk

Letter

By:
Date:
Location: Washington, DC

Congressman Mike Michaud, Chairman of the House Trade Working Group, has sent a letter to Treasury Secretary Tim Geithner and United States Trade Representative Ron Kirk expressing his serious concern about South Korea's ongoing intervention in its currency and its impact on U.S. businesses and workers, particularly now that the Korea-U.S. Free Trade Agreement (FTA) has been implemented.

"The undervaluation of the won already gives Korean exports a competitive advantage over U.S.-made goods, and if left unchecked it will neutralize Korean tariff reductions included in the agreement," wrote Michaud. "Passage of the Korea FTA was hailed as a means to increase U.S. exports by reducing Korean trade barriers and tariffs. Regardless of my vote against the agreement, I am now committed to ensuring that all of the FTA's opportunities for U.S. manufacturers are optimized and all barriers to the Korean market are dismantled. The undervaluation of the won could undermine tariff gains for U.S. companies in the FTA and has been a documented boost to Korea's exports at the expense of our own. It is critical that the implementation of the Korea FTA be accompanied by an explicit policy to address Korea's currency intervention and its consequences for U.S. exports."

In August, Michaud sent a letter to the Treasury Department that supported the inclusion of provisions prohibiting currency manipulation in the Trans-Pacific Partnership Agreement.

The full text of the letter Michaud sent to Geithner and Kirk yesterday can be found below.

Dear Secretary Geithner and Ambassador Kirk:

I am writing to express concern about Korea's ongoing intervention in its currency and its impact on U.S. businesses and workers, particularly now that the Korea-U.S. Free Trade Agreement (FTA) has been implemented. The undervaluation of the won already gives Korean exports a competitive advantage over U.S.-made goods, and if left unchecked it will neutralize Korean tariff reductions included in the agreement. Unfortunately, the FTA does not provide any protection for U.S. companies against a manipulated won, which is why it will be imperative that your agencies closely monitor and respond to Korea's currency intervention.

Korea's intervention in its currency has been well-documented. The U.S. Treasury Department and the International Monetary Fund (IMF) have both acknowledged that the won is undervalued as a result of Seoul's monetary policy. Treasury's most recent "Report to Congress on International Economic and Exchange Rate Policies" indicated that Korea's currency has strengthened due to global economic fluctuations but is still 10 percent undervalued. The December 2011 report found that the won was 21 percent weaker on a nominal basis against the dollar than it was in 2006 and 2007, before the global financial crisis occurred. In addition, news reports regularly discuss the Bank of Korea's intervention in the currency market to respond to a strengthening won.

Intervention in the won has been a key component of Korea's long-pursued export promotion policy. In 1964 the Korean government rolled out the slogan "Exports Number One" and devalued the won, a move that was one of the tenets of the government's Five Year Plan. In the subsequent five decades, Seoul has prioritized export expansion, often through currency intervention, with great success; the value of Korea's goods exports increased nearly 45 percent from January 2010 to January 2011. According to the World Bank, Korea's exports of goods and services accounted for 52 percent of the country's GDP in 2010, which is far above China's 30 percent and considered one of the highest export-dependence rates in the world.

Korea's currency intervention and export promotion policies have had negative consequences for American manufacturers. It is no coincidence that in 2001, when the annual exchange rate of the won was at its weakest point of the last decade, the value of U.S. goods exports to Korea was at its lowest level in the last 10 years. Although the total value of U.S. exports of goods to Korea
increased by 45 percent between 1996 and 2010, our exports to Seoul as a share of total U.S. goods exports decreased by more than 25 percent. Over the same period, the total value of U.S. imports of goods from Korea increased more than 115 percent, and our trade balance with Korea shrank from a trade surplus of nearly $4 billion to a trade deficit of more than $10 billion. These statistics clearly demonstrate the ability of Korea's currency intervention policies to boost their exports at the expense of U.S. manufacturers.

I am concerned that the consequences of Korea's undervalued won for U.S. manufacturers could be exacerbated by the tariff reductions included in the trade agreement. Answers to the following questions will help me determine what framework has been established to address these concerns and what resources are available for businesses in our districts and across the country whose ability to compete on a level playing field is undermined by Korea's monetary policy:

What consultation process has been established between the U.S. and the Korean governments to address currency intervention issues as they relate to the free trade agreement and the U.S.-Korea trade relationship?
What analysis has been done by your two agencies on the potential consequences Korea's monetary policy could have on U.S. exports of goods to Korea and how does the complete implementation of the FTA's tariff schedule affect those consequences?
What resources are available for companies in our districts that believe Korea's undervalued won is resulting in a disproportionately increased volume of Korean imports or limited access to the Korean market despite the FTA's reduction of trade barriers?
Passage of the Korea FTA was hailed as a means to increase U.S. exports by reducing Korean trade barriers and tariffs. Regardless of my vote against the agreement, I am now committed to ensuring that all of the FTA's opportunities for U.S. manufacturers are optimized and all barriers to the Korean market are dismantled. The undervaluation of the won could undermine tariff gains for U.S. companies in the FTA and has been a documented boost to Korea's exports at the expense of our own. It is critical that the implementation of the Korea FTA be accompanied by an explicit policy to address Korea's currency intervention and its consequences for U.S. exports.

I look forward to your responses to the questions listed above and to working with you to ensure that American manufacturers are not undermined by Korea's currency policy.

Sincerely,
Mike Michaud
Member of Congress


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