South Korean Opposition Threatens to Scrap US Free Trade Deal
South Korea's opposition leader threatened that if her party wins the race for president, it will scrap the free trade agreement between South Korea and the United States.
Democratic United Party (DUP) chairwoman Han Myeong-sook said that unless the current government revises certain clauses in the free trade agreement, her party would be forced to repeal the entire free trade agreement if it wins the next election. The DUP also sent letters to United States President Barrack Obama and other leading American politicians requesting that they look into the matter.
The opposition says that one of the clauses in question, which Han Myeong-sook called "poisonous", would allow American companies to circumvent South Korean courts and take their disputes to international courts. Critics of the free trade agreement say that this would be a blow to South Korean sovereignty.
Opponents to the free trade agreement say that the United States has more to gain from the agreement than South Korea does, while supporters of the free trade agreement say that the DUP is threatening to repeal the free trade agreement simply to woo left leaning voters in the upcoming election.
The supporters of the free trade deal say that repealing the free trade agreement would hurt South Korea's credibility. They also worry that such an action could hurt political ties between South Korea and the United States.
The United States is a crucial market for South Korean exports, so if the free trade agreement is repealed the South Korean economy could suffer.
Traders who believe that if the opposition party wins the presidential elections it will seek to revise the free trade deal, rather than repeal it, might want to consider the following trades:
- Overall, the free trade agreement should benefit South Korea. If the opposition succeeds in getting the deal amended, loses the election or goes back on its word to repeal the entire deal, the iShares MSCI South Korea Index (NYSE: EWY) ETF could move higher.
- Individual South Korean stocks like SK Telecom (NYSE: SKM), POSCO (NYSE: PKX) and LG Display (NYSE: LPL) could also benefit if the free trade deal stands. Although they hold more risk than the iShares MSCI South Korea Index (EWY) ETF, they also have more upside potential.
Traders who believe that the free trade deal will be scrapped may consider alternative positions:
- While repealing the deal could be popular with some segments of South Korean society, such an action could do more harm to the economy than good. Investors who feel that the oppositions lead in the polls will result in the free trade agreement being repealed might want to short Korean stocks.
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