[Insight & Opinion] Possibility of a Second Plaza Accord and Key Issues to Watch

Tariff and Exchange Rate Strategies for U.S. Manufacturing
Low Likelihood of a "Mar-a-Lago Agreement"
But Pressure for Exchange Rate Negotiations May Become Reality

Jan Tinbergen, the first recipient of the Nobel Prize in Economics for his work in econometrics, argued that economic policy objectives should be clear and achievable. He stated that economic policy is effective only when the number of policy instruments held by the government is equal to or greater than the number of policy objectives. In other words, to achieve n policy objectives, there must be at least n policy instruments.

The main economic policy objective of U.S. President Donald Trump is the revival of American manufacturing. This is difficult to achieve through tariff policy alone. Perhaps for this reason, major countries are now focusing on the possibility of the "Mar-a-Lago Agreement," a 2025 version of the Plaza Accord that would lead to a weaker U.S. dollar.

This term first appeared in the report "A Guide to Restructuring the World Trade System," released in November last year by Stephen Miran, Chairman of the White House Council of Economic Advisers. The strategy appears to be that the United States will use both tariffs and exchange rates as dual weapons, protecting its manufacturing sector through tariff policy while seeking a multilateral agreement for a weaker dollar. The Japanese government has stated that separate ministers will be in charge of negotiations on tariffs and exchange rates, respectively. At this point, if the United States were to demand a policy similar to the Plaza Accord from us, there are important aspects we need to understand thoroughly.

First, the decline in the value of the dollar was the result of a policy combination of the Plaza Accord and interest rate cuts by the U.S. central bank. This is why President Trump is pressuring Federal Reserve Chair Jerome Powell to lower interest rates. The Plaza Accord was an agreement on exchange rates announced in September 1985 at the Plaza Hotel in New York by the finance ministers and central bank governors of the United States, France, West Germany, Japan, and the United Kingdom.

Advanced economies, fearing a recurrence of the dollar crisis of the late 1970s due to the United States' severe fiscal and current account deficits, reached this agreement. This took into account the fact that the U.S. dollar had appreciated by about 50% against major currencies between 1980 and 1985. One year after the Plaza Accord, the value of the dollar fell by almost half against the yen. Was this solely due to the Plaza Accord? At the time, U.S. authorities also lowered interest rates as inflationary pressures eased due to falling international oil prices, which further accelerated the decline in the dollar's value.

Second, there are repercussions that could result from an artificially induced decline in the value of the dollar. The "yen carry trade," in which investors borrow yen at low interest rates to invest in countries with relatively higher interest rates, could create turmoil in global asset markets. If a weaker dollar leads to an exodus of foreign equity investors from the U.S. asset market and a surge in U.S. Treasury yields, this would be problematic. Unlike during the Plaza Accord, it is questionable whether it is possible to achieve the conflicting goals of a weaker dollar and lower Treasury yields at the same time.

Third, given that U.S. tariffs are already having a significant impact on our export indicators, the appreciation of the won is a concern. From May 1 to May 20, exports to the United States plunged 14.6% compared to the same period last year. During this period, Korea's total exports also declined by 2.4%. Last year, the growth contribution of Korea's net exports (exports minus imports) reached 1.9 percentage points, the highest level. The growth contribution of domestic demand was only 0.1 percentage points, which was almost negligible. If a lower exchange rate leads to reduced exports and entrenched low growth, this cannot be overlooked.

Despite strong U.S. pressure, our foreign exchange authorities maintain that there is no possibility of a "second Plaza Accord." Indeed, the current foreign exchange market is incomparably larger than it was in 1985. Nevertheless, the Trump administration's approach to exchange rate negotiations could still result in the establishment of a certain band. Tariff and exchange rate negotiations are issues that the incoming administration must address properly. The hour of destiny is ticking ever closer.

Wonkyung Cho, Professor at UNIST and Director of the Global Industry-Academia Cooperation Center