South Korea’s attempt to reach a new trade agreement with the United States—one that would lower tariffs on exports—has stalled. The key reason? Foreign exchange (FX) pressure. A proposal modeled after a recent $550 billion US-Japan investment package has raised concerns in Seoul over the potential impact on the Korean won and the country’s currency market.
While Japan has already signed the deal, South Korea is pushing back, citing fundamental differences in economic structure and FX capacity.
The Japan Deal: A Costly Benchmark
Under the US-Japan agreement signed earlier this month, Tokyo committed to transferring funds within 45 days of a US-selected project. Japan also agreed to share free cash flows evenly with the US up to a pre-agreed amount—after which 90% would go to the US.
In contrast, South Korea’s proposed $350 billion package is mostly built around loans and guarantees. Direct investments would be limited. Nevertheless, the US has demanded identical terms. “The Japanese signed the contract. The Koreans either accept that deal or pay the tariffs,” said Commerce Secretary Howard Lutnick.
Won vs. Yen: The Currency Challenge
One major difference lies in currency capacity. The Japanese yen enjoys global reserve currency status and benefits from an unlimited FX swap line with the US. The South Korean won does not.
As of 2022, the global daily trade volume for the won was just $142 billion, compared to $1.25 trillion for the yen. The won holds only 2% of global FX market share—far behind the yen’s 17%.
The lack of an offshore won market amplifies the problem. While South Korea has made some moves toward liberalization, its FX market remains largely onshore and tightly regulated, especially since the Asian financial crisis of the late 1990s.
Dollar Demand and FX Pressures
South Korea is particularly vulnerable to FX volatility. The won has already shown weakness, hitting a 15-year low of 1,476 to the dollar in late 2024 and currently trading around 1,390.
Ongoing dollar outflows are already a strain. The National Pension Service alone requires $40 billion annually for overseas investments. Citi estimates that the proposed investment package would create an additional $100 billion in dollar demand annually between 2026 and 2028—an enormous weight on the country’s FX reserves.
By comparison, South Korea’s current account surplus stood at $99 billion in 2024, and its foreign exchange reserves at $416 billion as of August 2025. Japan, by contrast, had a surplus of $200 billion and reserves topping $1.3 trillion.
Seeking Alternatives: Currency Swap Talks
To avoid tariff penalties while protecting its currency market, South Korea is exploring new mechanisms. A bilateral FX swap line with the US is under consideration. Presidential Policy Secretary Kim Yong-beom recently pointed out that Japan’s swap line with the US gave it a clear negotiating edge.
Finance Minister Koo stated that an announcement regarding foreign currency arrangements would follow the conclusion of tariff talks. While the US has not committed, there are hopes in Seoul that Washington might revive a temporary swap line.
During the COVID-19 crisis in March 2020, the US Federal Reserve opened $60 billion swap lines with nine central banks, including the Bank of Korea. These expired in December 2021 but were replaced with repo agreements—less flexible and more collateral-dependent mechanisms.
Outlook: What Comes Next?
Time is running out. Former President Donald Trump has made it clear that South Korea must agree to the current terms or face a 15% tariff on imports.
While both sides are still in discussions, Seoul appears determined to negotiate an alternative that reflects its economic reality. Without a large, liquid currency market or international status for the won, mimicking Japan’s deal is more than a political issue—it’s a systemic risk.
If a bilateral swap line or modified investment structure can be agreed upon, the deal may still proceed. Otherwise, businesses on both sides of the Pacific should prepare for a new tariff regime—and its ripple effects across industries like autos, electronics, and steel.