South Korea’s Trade Deal Warning: 1997-Style Financial Crash Looms

Trade tensions threaten to unravel decades of economic stability

The Warning Signs

Seoul's financial regulators sound alarms over potential market contagion. New trade restrictions could trigger capital flight reminiscent of Asia's financial crisis. Currency volatility already testing central bank defenses.

Systemic Vulnerabilities

Export-dependent economies face perfect storm of protectionist policies. Supply chain disruptions amplify existing financial fragilities. Foreign reserves depletion risks creating domino effect across emerging markets.

Market Reactions

Traders pricing in heightened volatility across Asian currencies. Short sellers circling vulnerable economies like hawks. Bond markets flashing warning signals unseen since pre-crisis periods.

Because nothing says 'economic diplomacy' like threatening to repeat history's worst financial collapses—just ask any banker who still thinks trade wars are 'easy to win.'

Lee confronts trade fight, immigration raid, and defense split

Lee came into power in June after his conservative predecessor, Yoon Suk Yeol, was kicked out and jailed for imposing martial law. Since then, Lee’s been trying to cool tensions in the country and its economy.

He told Reuters he’s using his visit to the U.S. to show that “democratic Korea is back.” He met Donald TRUMP in August for the first time as president, though the two didn’t issue a joint statement or formal announcement.

Things got worse this month when Trump’s administration ordered a federal raid on a Hyundai battery plant in Georgia. U.S. agents detained over 300 South Korean workers for immigration issues and published photos of them in shackles.

Lee said people in South Korea were angry about how the workers were treated and warned that it could make companies second-guess investing in America. Still, he said the relationship between both countries would hold.

“I do not believe this was intentional, and the U.S. has apologised for this incident, and we have agreed to seek reasonable measures in this regard and we are working on them,” Lee said. He added that Trump personally offered to let the workers stay in the country.

There’s no scheduled meeting between Trump and Lee during the New York visit, and trade talks aren’t even on the agenda. Commerce Secretary Howard Lutnick told South Korea to follow the path Japan took. Japan accepted a deal with the U.S. earlier this year, and Lutnick warned that Seoul either needs to do the same or keep paying tariffs.

Trump’s team insists foreign governments pay those levies, even though they’re technically paid by U.S. importers. Asked if he’d walk away from the deal, Lee said, “I believe that between blood allies, we will be able to maintain the minimum amount of rationality.”

South Korea offered to set up a foreign exchange swap line to reduce damage to its currency, but Lee didn’t say whether the U.S. would go for it. He stressed that Seoul can’t be treated the same as Tokyo. Japan has more than double South Korea’s $410 billion in foreign reserves, a globally used currency in the yen, and its own U.S. swap deal. South Korea has none of that.

Trump demands full control over South Korean investments

Lee said both countries already agree that any investments must be commercially viable. But that’s where the agreement ends. Trump says he will personally pick the projects and that the U.S. will control where the money goes.

Lee’s adviser, Kim Yong-beom, said back in July that South Korea added safeguards to reduce risk, like only backing projects that make business sense.

But Lee told Reuters that the actual proposals being discussed don’t offer enough certainty. “Reaching detailed agreements that guarantee commercial reasonableness is now the central task, yet it also remains the biggest obstacle,” he said.

Lee then described a growing divide between countries like South Korea, Japan, and the U.S., and a bloc of China, North Korea, and Russia. He said South Korea’s geography puts it right in the middle of the danger.

“This is a very dangerous situation for Korea, and we must find an exit ramp out of the escalating military tensions,” Lee said. “We must find a way for peaceful coexistence.”

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