With the Special Act on Investment in the United States introduced in the National Assembly on the 26th, a political battle over a $350 billion (about 510.65 trillion won) strategic investment in the United States is expected to heat up. Kim Byung-kee, floor leader of the Democratic Party of Korea, who sponsored the bill, even used the phrase "national interest special act," but because the bill would require the Korean government to invest more than $20 billion in the United States every year, the ruling and opposition parties are expected to scrutinize each clause. Heo Yeong, the Democratic Party of Korea's senior deputy floor leader for policy, who submitted the bill the same day, also said, "The parties will put their heads together in the National Assembly to examine whether there is anything that could harm the national interest," adding, "We will proceed with the review thoroughly without setting a deadline."
The opposition People Power Party is signaling a piercing review of the bill. From the opposition's standpoint, it also helps that the chairperson of the Strategy and Finance Committee, the relevant standing committee, is Lim Lee-ja, a People Power Party lawmaker. The People Power Party says the agreement should go through National Assembly ratification rather than a Special Act on Investment in the United States. It is expected to take quite some time to process the bill in the Strategy and Finance Committee.
The most contentious issues are the method of distributing principal-and-interest revenue and the safeguards. If a project in which Korea invested generates revenue, the investment revenue is split between Korea and the United States at a 5-to-5 ratio. That ratio is maintained until repayment of principal and interest is complete. After principal-and-interest repayment ends, the investment revenue split changes to 1-to-9 for Korea and the United States, respectively.
The U.S.-bound investment is set with a 20-year time limit. If it appears difficult to repay all principal and interest within 20 years, the revenue-sharing ratio can be adjusted. The repayment interest rate was set 0.3 percentage points higher than what Japan agreed with the United States. The repayment interest rate is calculated by using the 20-year U.S. Government Bonds fixed rate as the base rate and adding a spread. The spread is 30 basis points (0.3 percentage point) higher than the spread agreed between the United States and Japan. Minister of Trade, Industry and Energy Kim Jung-kwan, explaining the interest revenue, emphasized, "In terms of rate of return, we are more than 100 basis points better off than Japan."
The government says it designed the revenue-sharing method to be as favorable to us as possible, but the fundamentally unfair reality remains that we must share half of the revenue generated from projects we invest in with the United States. Kim Yong-beom, Presidential Chief of Staff for Policy, who led the negotiations, used the expression that this investment revenue split is "worse than the Eulsa Treaty," and said, "We will continue to raise the issue." The People Power Party also appears likely to focus on the investment revenue split during the bill review.
There is also a high chance that there will be no revenue at all, or that revenue will be so small that even the interest expense is hard to cover. The 20-year U.S. Government Bonds fixed rate is around 4.61%. Even assuming the repayment interest rate is about 5% after adding the spread, investing $20 billion a year would generate $1 billion (about 1.46 trillion won) in interest expense. It is not easy to consistently find projects capable of generating that level of revenue for 10 years. It is also unclear how the burden will be handled if losses occur.
Whether the safeguards to prevent losses will function properly is also key. The government plans to create a special-purpose vehicle (SPV) for each project to make investments. An investment special-purpose corporation that oversees all projects will be placed above each SPV to manage the principal and interest we have invested. The reason for this structure is to confine the risk to the relevant corporation even if a particular project incurs a loss. However, because the government provides a guarantee, there is a limit to fully dispersing the loss risk.
The ruling and opposition parties also differ over foreign exchange market stabilization measures. The government says it limited the annual U.S.-bound investment cap to $20 billion through an MOU with the U.S. government and the special act, but the amount is still large enough to burden the foreign exchange market. Anxiety is not small after the currency swap that the market had hoped for failed to materialize. On the 25th, People Power Party lawmaker Kim Geon said at a floor countermeasures meeting, "An annual $20 billion investment is the emergency cash for stabilizing our foreign exchange market flowing out," and pointed out, "With no currency swap in place, we inevitably need emergency cash, so there are concerns about how to secure $20 billion to collateralize foreign exchange market stability."