[Li Zhiyin, special correspondent of the Global Times in South Korea] The negotiations between South Korea and the United States around the US $350 billion investment in the United States have reached a deadlock. Li Zaiming's government adheres to the principle of "giving priority to national interests" to negotiate with the United States, but it is difficult to negotiate solutions including fund investment methods, fund raising and profit distribution. According to Yonhap News Agency's report on the 22nd, South Korean President Lee Jae-myung said in an interview with Reuters and the BBC on the eve of the UN General Assembly that the ROK strives to reach a tariff agreement with the US as soon as possible. However, if the ROK invests $350 billion in cash according to the requirements of the US, South Korea "will face a financial crisis similar to that of 1997" without signing a currency swap agreement between South Korea and the United States.

What does $35 billion mean for South Korea?

According to reports, Lee Jae-myung pointed out that there are still differences between South Korea and the United States on the "commercial rationality" of investment, which is the biggest obstacle to negotiations. He stressed that investment projects must be feasible and reasonable, otherwise it will shake the foundation of South Korea's financial system. He also specifically mentioned that the US-Japan investment agreement previously signed by Japan relies on foreign exchange reserves, but "the situation in South Korea and Japan is different" and South Korea cannot simply copy this model.

When the South Korean government announced that it had reached an "agreement in principle" with the United States in July this year, it explained that the investment of $350 billion was "mostly guarantees and loans, and cash only accounted for a very small part". However, it was recently revealed that the United States asked the South Korean side to "almost all contribute in cash". South Korea's Chosun Ilbo said that the short-term investment of US $350 billion exceeded South Korea's total global overseas direct investment (FDI) in the past five years.

According to South Korean Import and Export Bank data, South Korea¡¯s global direct investment amounted to $3489 billion between 2020 and 2024, which means that even if all South Korean enterprises, policy-making banks, governments and public institutions put together the total amount of global investment over the past five years, it is not enough to put together all of the U.S. investment funds.

In addition, according to the United Nations Conference on Trade and Development¡¯s ¡°net FDI¡± data standard (i.e. the amount of investment flowing into South Korea minus the amount of investment leaking out of South Korea), $350 billion is equivalent to South Korea¡¯s total foreign direct investment over the past 35 years (about $362.4 billion), which also exceeds the total global direct investment in the United States last year ($292.3 billion).

'Manufacturing could collapse'

South Korea is concerned that if the U.S. demands are followed, the South Korean economy may fall into paralysis.The professor of economics at Jiangsu University said that after US investment in 2015-2024, domestic factory shutdowns will be higher than the new establishment rate, directly impacting domestic employment and investment.

There is a view that the government can immediately use foreign exchange reserves to secure these investments. However, according to Chosun Ilbo, as of the end of July this year, South Korea's foreign exchange reserves were about 411.3 billion US dollars. Although it is higher than $350 billion, it is by no means sufficient. South Korea's foreign exchange reserves account for only 23% of GDP, which is significantly different from Switzerland and other countries with similar economic structures. Even if foreign exchange reserves are used for many years, it may lead to problems such as the downgrade of national credit rating. If the credit rating drops, the interest rate of government bonds will rise accordingly, resulting in a sharp increase in the government's interest burden.

In order to prevent the outflow of foreign exchange, raising investment funds by issuing government bonds will also bring a huge financial burden. Although policy banks can issue US dollar-denominated bonds, the current annual issuance scale of such bonds is only about US $10 billion. If we rely on Korean won government bonds to exchange foreign exchange, it may lead to the soaring exchange rate and the withdrawal of a large number of foreign investors. To solve this problem, the Korean government once proposed to the United States to sign a swap agreement between Korean won and US dollar, but the United States held a negative attitude.

¡°If I fully accept America¡¯s demands, I will be impeached.¡±

In addition to being worried about the investment scale of US $350 billion, all walks of life are even worried about the uncertainty of investment direction decision and profit distribution structure. Japan had previously promised to invest US $550 billion in its agreement with the United States, and left 90% of its profits in the United States. This precedent worries South Korea that it will fall into the same "blood loss trap".

In addition, the U.S. demanded the authority to decide which projects, investment quotas and timelines South Korea¡¯s funds are specifically invested in. South Korean trade experts have generally pointed out that ¡°all funds are borne by us, but it is unfair to allow the U.S. to arbitrarily control the investment program.¡± Lee said in an interview with Time magazine in early September: ¡°If I fully accept the U.S. demands, I will be impeached.¡±

However, experts agreed that it was difficult for the South Korean government to continue to reject U.S. demands and that there were only a few cards left in the hands of the South Korean government.¡±The industry predicted that the longer the negotiations between the two countries would last, the heavier the burden on South Korean exporters. According to official data released on Monday, South Korea¡¯s tariff payment in the second quarter amounted to $3.3 billion, which increased by 47.1 times compared to zero tariffs during the fourth quarter last year¡¯s South American Free Trade Agreement.