Korea and the United States, at a summit on the 29th, adjusted the originally agreed $200 billion in investment in the U.S. to be made over 10 years at $20 billion per year, drawing assessments that the country avoided a foreign exchange crisis caused by a massive outflow of foreign currency. Still, there are concerns that it could pose a long-term burden considering the size of the Korean economy.
The $20 billion (28 trillion won) investment in the U.S. agreed by the two countries exceeds the Korean government's annual budget for social overhead capital (SOC) (27.5 trillion won in the 2026 draft budget). This means Korea would have to invest in the U.S. each year an amount on par with the domestic infrastructure budget.
Presidential Chief of Staff for Policy Kim Yong-beom said at a briefing held at the APEC press center in Gyeongju that day, "The $350 billion in financial investment in the U.S. consists of $200 billion in cash investment and $150 billion in shipbuilding cooperation," adding, "We set the annual investment cap at $20 billion."
Kim went on, "The $200 billion investment is not made all at once, and dollars will be invested depending on project progress within the annual cap of $20 billion," adding, "It is within the range our foreign exchange market can bear and can minimize the impact on the forex market."
Regarding how to raise the $20 billion, Kim said, "We plan to use the returns from managing our foreign currency assets," adding, "There is a considerable amount of management revenue such as interest and dividends, so it seems we can use quite a lot, and if some of it needs to be financed through borrowing (bond issuance), it will likely take the form of government-guaranteed bonds."
◇ BOK chief says "$20 billion a year is a relief"… Switching to a 10-year schedule cuts interest burden by $40 billion
The two countries kept Korea's investment in the U.S. at $200 billion that day but changed the method from a "lump-sum payment" to "installments." The U.S. side initially demanded "prepayment," but the Korean side strongly conveyed concerns that the scale of the U.S.-bound investment ($350 billion) amounts to 83% of Korea's foreign exchange reserves ($420 billion), raising the risk that a temporary foreign currency outflow could trigger a forex crisis.
The U.S. Treasury shared this view, and ultimately accepted our request to change the method from a lump-sum payment to 10-year installments. Based on a 3% Government Bonds yield, the compound interest savings effect from paying $200 billion over 10 years amounts to about $40 billion.
There is also an assessment that while sending out $200 billion at once would heighten forex instability, $20 billion per year is a scale the Korean economy can handle.
Bank of Korea Governor Rhee Chang-yong said at the Strategy and Finance Committee's comprehensive audit that it was "a relief" to set the annual cap on cash investment in the U.S. at $20 billion. Before the tariff talks were concluded, Rhee had also said that a scale of $15 billion to $20 billion per year would not require overseas borrowing (bond issuance) and would be manageable for Korea.
Kang Sung-jin, an economics professor at Korea University, said, "Today's outcome appears to be the best result for our side," adding, "If it is around $20 billion, it is a scale that can be sufficiently accommodated as an investment concept."
Lee Si-wook, president of the Korea Institute for International Economic Policy (KIEP), also said, "It seems we managed to get the best possible outcome from a difficult negotiation," adding, "That said, even at a reduced scale, $20 billion is not small. Korea is in a situation where it has to walk a path it has not taken."
◇ Safeguards are in place across the board… But the ripple effects carry high "uncertainty"
In reaching agreement on this trade negotiation, our government put in place several safeguards. A prime example is establishing an investment committee and a consultative committee to mutually consult on and decide specific investment projects. Kim explained, "We decided to specify in the MOU text that only projects with commercial rationality that ensures principal and interest will be pursued."
Another safeguard is that the investment funds will not be spent arbitrarily but paid according to work progress, that is, milestones in the project. Kim explained, "We will pay in installments only to the extent the project advances and actual investment is made."
While these safeguards can be seen positively in terms of minimizing the spillover effects on our economy, it seems hard to avoid the assessment that they have saddled the Korean economy with a long-term burden.
Lee Seung-heon, a professor of economics at Soongsil University, said, "It has been cut to $20 billion, but that is still a sizable amount," adding, "If the investment funds are raised as external debt, the increase in the government's external liabilities will also be a burden."
Even Kang Sung-jin, who assessed the outcome positively, said, "There are concerns about hollowing out domestic industry due to expanded investment in the U.S.," adding, "Our strong shipbuilding and automobile manufacturing industries could move en masse to the United States. The ripple effects on our economy could be larger than expected."
◇ How to raise the investment funds… Potential to use BOK and KIC management revenue
Attention is also on how to raise the annual $20 billion in investment funds. Kim said the government would use returns from managing foreign currency assets.
Inside and outside the government, one option under discussion is to use the returns from managing the foreign currency assets of the Bank of Korea and KIC as the main funding source and, if necessary, raise part of it by issuing government-guaranteed bonds. An official at the Ministry of Economy and Finance said, "A significant portion of investment management revenue on foreign currency funds is generated at the BOK and KIC. The National Pension Service's overseas investments could also be included."
How much revenue do their foreign currency investments generate? KIC said it managed $206.5 billion last year and recorded an 8.49% return on assets under management. Based on this, KIC's asset management revenue last year is estimated to have reached $17.5 billion.
The BOK also manages $420 billion in foreign exchange reserves. The BOK is not currently disclosing the specific rate of return on its reserves management. Assuming a 5% return on the BOK's foreign exchange management, that would be $21 billion. In fact, the BOK said in its annual report last year that it recorded 21.0759 trillion won in income such as interest on securities, gains on securities trading, and gains on foreign exchange trading. Of the marketable securities held by the BOK, 94% are foreign currency securities.
Cho Yong-gu, an analyst at Shinyoung Securities, said, "Of the $20 billion in U.S.-bound investment funds, a scenario in which $15 billion is covered by returns on managing foreign currency assets and $5 billion is raised by issuing foreign currency bonds seems feasible," adding, "This agreement has lowered the likelihood of a sharp surge in the won-dollar exchange rate."
If the investment in the U.S. enters a stable phase and generates profits, there is also talk of channeling those earnings back into the U.S. investment funds. A financial institution official said, "It should also be possible to reinvest the earnings generated from the U.S. investment," adding, "In the long run, it appears the view is that investment earnings will be able to cover a substantial portion of the principal."