The Korean won appears to be pricing in risks that belie the current, strong domestic economic data. Despite improving growth, booming semiconductor orders and benign inflation, the Korean won is underperforming emerging market peers -- depreciating 2.74 percent against the U.S. dollar since September, compared to declines of 1.36 percent for the Thai baht, 0.82 percent for the Indian rupee and 0.09 percent for the Malaysian ringgit over the same period. We believe the market is pricing in uncertainty arising from Korea's tariff deal with the U.S., which involves investing $350 billion in the U.S. as part of a tariff adjustment framework to avoid the impact of punitively high, immediate U.S. tariffs. The government has yet to officially explain the implications of this investment amount and how it will be structured, creating turmoil among markets and the public.

The domestic debate has broken into two predictable camps, both partisan and not well considered, in our view. One side says Korea should reject U.S. demands outright, citing national interests and pride, while the other argues for quick compliance to secure U.S. market access to avoid short-term economic pain. We don't see this issue as a matter of pride versus concession, but more as a test of whether the government can act as a strategic allocator of capital, acting in the country's interests over allowing quick concessions to a significant trade partner.

President Trump's administration has departed from traditional trade diplomacy in using tariffs and the front of cooperation between allies as negotiation tools to attract industrial capital back into the U.S. Tariff relief is no longer being tied to reciprocal trade adjustments but to co-investment pledges that essentially redirect Asian trade surpluses into American manufacturing capacity. Japan has already agreed to a $550 billion commitment with minimal public confrontation; Malaysia is positioning to secure friend-shoring flows; and India is negotiating trade terms with the U.S. under political pressure.

For its part, Korea is facing U.S. investment demands scaled to a much larger balance sheet -- the size of Japan's -- than it possesses. For example, Japan has $ 1.3 trillion in foreign exchange reserves and over $3.4 trillion of net external assets, while Korea has a third of these numbers -- $416 billion in reserves and a $ 1.03 trillion net international investment position. Japan could absorb its $ 550 billion pledge as a symbolic diplomatic 'sacrifice.' Meanwhile, if mishandled, Korea's $350 billion pledge could become economically crippling via adverse currency pricing and constraints on domestic capital deployment.

Markets are not expecting Korea to simply fork over $ 350 billion of investment to the U.S. in a straight-line transfer. Their concern seems focused on the structure and timeline of the investment pledge -- information that has not been forthcoming from the government. This vacuum may be forcing markets to price in the worst-case outcome by default. And the longer this information remains unclarified, the wider the Korean won discount will likely grow relative to fundamentals.

Despite internal political dissent, Japan has maintained its narrative discipline regarding its U.S. trade deal. Japanese officials have consistently framed their pledge as capital orchestration, not a fiscal burden; while somewhat rhetorical, the clarity of this tone alone seems to have stabilised its domestic asset markets. By contrast, Korea has not yet provided such an anchor, with each successive week of ambiguity likely leading to a shadow-tightening of financial conditions. For a mid-sized open economy such as Korea, we believe clarity of narrative functions as a form of monetary policy.

On the one hand, walking away from U.S. trade deal negotiations is not a realistic option for Korea, as its industrial model relies on privileged U.S. market access, particularly in autos, batteries and semiconductor-linked manufacturing. With Japan facing a 15 percent U.S. tariff on auto parts, if Korea were to enter a tariff standoff, Korean auto manufacturers would face a 10 percentage point competitive disadvantage against their Japanese auto peers, potentially translating into trillions of dollars of lost earnings each year just to maintain Korea's share of the U.S. market.

On the other hand, while Korea needs a U.S. trade deal, it does not have to accept the headline number at face value. We believe the government could work out a strategic pathway to redefine the investment pledge as a structured industrial capital programme, phased over multiple years.

Countries with limited external buffers need to engage with a problem-solving mindset and negotiate with intelligence, not expedience, in our view. If Korea presents its pledge as engineered capital allocation, not a straight-line capital transfer, the market narrative could reverse. This could retighten the KRW discount, not only through improved sentiment but because the structure itself looks investable.

The government has already floated the idea of a swap line with the U.S. Within the right structure, this signals foresight -- a sovereign hedging its exposure as it deepens strategic capital ties. However, a swap line without a defined deal architecture risks being read as a fire extinguisher, not a design feature; markets might move to instantly price in this distinction.

Korea's deal negotiations with the U.S. are a credibility test, not a liquidity test, in our view. Japan could afford to agree now and adjust later because markets trust its balance sheet. But with its smaller balance sheet, Korea cannot emulate this stance; its leverage lies in the sophistication of its response, not the size of its reserves. We think to avoid an increasing drift in currency pricing, the government needs to move deliberately and quickly to define the parameters, pacing and financial design of its $ 350 billion commitment. A sustainable and clearly outlined pathway should stabilise the KRW more effectively than intervention in spot markets.

To set a favourable long-term precedent, Korea needs to seize the moment and position itself as a strategic allocator of capital rather than a reactive middle power offering easy concessions in bilateral dealmaking.

The $350 bil. question: Korea must negotiate like a strategic power, not a reactive one - The Korea Times