AS THE REAGAN ADMINISTRATION casts about for scapegoats to this nation's projected $170 billion trade deficit, both South Korea and Taiwan have recently come under the gun.
The administration's attempts to shift blame for trade deficits onto anyone else may seem suspect in light of continued $200 billion budget deficits, but in this case there is ample justification.Unlike most currencies, the Taiwan dollar and the South Korean won are not freely traded. Rather they are tied closely to the U.S. dollar. So while the U.S. dollar has fallen some 47 percent against the yen and 42 percent against the deutsche mark since February 1985, it has depreciated only 8 percent against the Taiwanese dollar while actually appreciating 2.5 percent against the won.
In lockstep with this exchange rate rigidity is the increase in the bilateral trade surplus between the United States and these two countries. Taiwan's trade surplus with the United States for 1986 is projected at $15.6 billion (or roughly 24 percent of Taiwan's GNP), up from $7.4 billion in 1983. South Korea's surplus for the year is estimated at $7 billion - a big increase
from the surplus of $1.7 billion since 1983.
It's impossible to tell how much these surpluses are attributable to controlled currencies. Morgan Guaranty Trust estimates that currency adjustment for these two countries plus Hong Kong would shave only $10 billion to $15 billion from the U.S. trade deficit. Keith D. Hargreaves, vice president for international economics at Morgan, says normally a 1 percent change in the dollar results in a shift in the trade balance of $2 billion to $3 billion. But in the case of these countries, he says, there is little historical evidence upon which to base any calculation.
Suffice it to say that the controlled economies of Taiwan and South Korea - of which the currency controls are but a part - are not scoring points with Congress or the administration.
Both Taiwan and South Korea need to liberalize their imports and stimulate their domestic economies. Taiwan recently agreed to remove barriers to imported alcohol and tobacco and South Korea has agreed to allow U.S. insurance companies access to the market, but more must be done.
Truth be told, a more liberalized economy would benefit both countries. It is only by removing import controls that Taiwan can import the materials and know-how it needs to lift its economy to the next plane - services and hi-tech industries. Stoking the domestic economy, perhaps through wage increases, would not only win points in Washington but might reduce existing political tensions by improving the quality of life of the citizenry.
Some differences between the two "Little Dragons," need to be drawn, however. Unlike Taiwan, which has a had a recent history of trade surpluses, South Korea will achieve its first surplus ($3.5 billion) this year. Taiwan also is sitting on foreign reserves of some $44 billion with a current account surplus of $12 billion. South Korea, on the other hand, remains one of the world's biggest debtors, owing its foreign creditors nearly $50 billion. For Korea an export led economy is essential. There is no such need for Taiwan.
Treasury Secretary James Baker already has lashed out at the two Dragons for their currency controls. Treasury is tight-lipped about what kind of
pressure it might levy against them. But incoming Senate Finance Committee Chairman Lloyd Bentsen is more vocal. He has spent time in the Far East and is critical of the exchange rate policies, and the import controls of both Taiwan and South Korea. (Hong Kong, which also maintains currency controls, has been above reproach because of its free markets.)
Both South Korea and Taiwan are to be commended for their astounding economic progress. But the time has come for them to adopt more responsible economic policies, if they expect continued cooperation from the United States.
After all, stoking domestic demand may be unsettling, but such disruption pales next to the muddle that would follow any retaliatory U.S. protectionist measures. For South Korea and Taiwan that should be incentive enough to cooperate.