$US-KRW Exchange Rate vs U.S. Balance of Trade with S. Korea

Continuing my series of examining the effect of exchange rate (or lack thereof) on trade imbalances, I’ll now examine South Korea, America’s 7th largest trading partner (year-to-date in 2010). 

Thus far, we’ve found that in trade between the U.S. and less densely populated nations, fluctuations in currency exchange rate has the effect that economists would predict:  a rise in the value of the dollar worsens our balance of trade while a falling dollar improves it.  However, in trade with more densely populated nations, there is no such effect.  In fact, if anything, the data indicates an opposite effect – that a falling dollar is more likely to yield a worsening in the balance of trade. 

The data for South Korea is an exception, but with a huge asterisk.  Here’s the chart showing the U.S. balance of trade with S. Korea, a nation almost 15 times as densely populated as the U.S., and the dollar-won exchange rate:

$US-KRW Rate vs Balance of Trade

There is a slightly positive correlation between exchange rate and the balance of trade.  But some closer examination casts doubt on the effect.  The effect was strongest during the period of ’93-’98.  However, during most of that period, the won was effectively pegged to the U.S. dollar.  In 1997, the IMF (International Monetary Fund), forced S. Korea to end that peg.  That, along with a simultaneous depegging of the Thai baht from the dollar and an economic collapse in that country, caused the East Asian financial crisis in 1997, an event that briefly threated global economic collapse.  The dollar soared vs. the won and resulted in a dramatic worsening in the balance of trade with S. Korea, turning a small trade surplus into a huge trade deficit. 

During the decade that followed, a year-by-year analysis shows a slightly positive correlation between balance of trade and exchange rate.  But when that decade is taken as a whole, a falling dollar actually had no effect in stemming the increase in the U.S. trade deficit with S. Korea. 

So this piece of data bucks the trend in the relationship that was taking shape, where the effect of exchange rate on the balance of trade decays as the population density of trading partner rises.  But I’ve included an asterisk for S. Korea, since the exchange rate was affected by unusual forces. 

However, the trade data with South Korea correlates perfectly with my population density theory.  We have a large trade deficit with S. Korea, just as it would predict. 

Here’s the correlation score sheet and chart:

Theory Correlation Score

The population density theory continues to be a far better predictor of balance of trade than the exchange rate theory. 

Next up will be U.S. trade with France, America’s 8th largest trading partner year-t0-date in 2010.

*****

Exchange rate data provided by www.oanda.com.

 

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8 Responses to $US-KRW Exchange Rate vs U.S. Balance of Trade with S. Korea

  1. MikeF says:

    Good Morning Pete,

    As these heavily populated and heavily dependent exports nations raise their living standards (South Korea has one of the highest levels of distributions of wealth), they are setting themselves up to be the next Japan.

    The U.S. and Canada (sparse population) are capable of maintaining a domestic economy of sorts…not so with S. Korea, Japan, Germany, etc.

    However, should our leadership not come to grips with our cherished debt and population based growth capitalism; we will also become Japan on the installment program.

    • Pete Murphy says:

      Did you see former Gen. Colin Powell on “Meet the Press” yesterday? He said that Republicans need to stop bashing immigration and that this country needs to welcome more immigrants to avoid the issue of an aging population. He said we need more immigrants in the labor force to support the growing number of retirees. I’m wondering how they’ll be of any support when it will simply add to the ranks of the unemployed.

      Regarding the issue of an aging population, I’m working on a post to more fully examine the costs and benefits involved.

  2. MikeF says:

    Good Morning Pete,

    When I hear such balderdash from prominent figures such as Colin Powell, I realize that we will never give up on our past successes of increasing population as a stimulus to a walking corpse.

    Do these people not understand that we are resource constrained? That the frontier is now settled and Los Angles and New York City are already over populated?

    Powell and other cornicopians believe that more people equal more consumption and more consumption is good for business. After all, it worked up to the time that it no longer worked. That’s as far as their economic knowledge goes.

    • Pete Murphy says:

      And just as culpable are the journalists who let them get away with such statements without connecting the dots to other issues. I think David Gregory is doing a respectable job replacing Tim Russert, but he blew a golden opportunity to probe deeper with the following question: “But Mr. Powell, our current rate of immigration will increase the U.S. population by 50% by 2050. Since the U.S. is committed to reducing carbon emissions by 80% by 2050, and since the U.S. is already overly dependent on foreign oil, and considering that unemployment is stubbornly stuck at around 10%, won’t continuing immigration at current rates only exacerbate all of these problems?”
      I’ve never heard any journalist make this kind of connection between these issues. Couldn’t one of them, just one time, put down the talking-points script and do some real thinking?

  3. Ken Hoop says:

    Pat Buchanan has a column out showing Powell and Obama are betraying their fellow blacks by sponsoring Mexican immigrants taking their jobs. Powell is completely discredited regardless by purposely lying about Saddam’s non-existent WMDs at the UN.

    • Pete Murphy says:

      I don’t see anything racial going on with either Obama or Powell regarding immigration. I think Obama is behaving as a typical liberal and Powell is trying to appeal to moderate conservatives. Neither understands the real problems associated with unending population growth. If both knew that the sum 4 was a problem, they’d still insist on importing 1’s, 2’s and 3’s. (In other words, neither of them can put 2 and 2 together.)

      I agree with the WMD statement.

  4. Ken Hoop says:

    Yes, but as you depict, “typical liberalism” policy employed will now betray native black interests, as will what passes as “moderate conservative” policy.
    So the betrayal might not be purposeful, nonetheless still a betrayal.

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