The weekend’s G-20 summit in Toronto was originally expected to feature a showdown over China’s currency policy, with leaders of other major economies pushing Beijing to allow a more flexible currency. But the main event was effectively canceled after China unexpectedly announced plans to let the yuan appreciate against the U.S. dollar [see Surprise Winners From A More Flexible Yuan]. Still, there were plenty of interesting developments over the weekend; perhaps the most significant was news of progress on a free trade agreement between the U.S. and South Korea.
The two countries reached a preliminary Free Trade Agreement in 2007, but lawmakers on both sides dragged their feet as concerns over a few key areas of the agreement were never resolved. One sticking point focused on the automotive industry; although tariffs on automobiles between the two countries would be significantly reduced, regulations that favored engine sizes commonly found in Hyundai products would have remained in place. Domestic automakers believe such measures will help Hyundai solidify its stranglehold on the South Korean market.
The other impasse related to beef. South Korea had banned imports of U.S. beef in 2003 after a mad-cow disease scare; the ban was lifted in 2008 but partially reinstated after massive public protests. But now it appears that these sticking points have been resolved. “There is an agreement on the outstanding issues including beef and autos,” said one U.S. official over the weekend. “The mechanism of how we address [them] is one of the things the discussions are about.”
Support for a Free Trade Agreement with South Korea is far from unanimous. Fearing job losses, unions are generally opposed to the idea. Businesses have generally been supportive, arguing that free trade would boost U.S. exports and lead to job creation on the home front. South Korea is currently the U.S.’s seventh-largest trading partner, accounting for about $35 billion in exports and $50 billion in imports in 2008. That figure fell off sharply last year, thanks in part to the global recession that slowed consumer spending.
Korea ETF Options
The impact of a new Free Trade Agreement on the Korean economy is uncertain, but most analysts agree that it would be a positive development for a country that has seen an escalation of tensions with rival North Korea. Enhanced access to U.S. consumers significantly increase demand for electronics products manufactured in Korea. For investors looking for exposure to South Korean equities, there are two ETFs offering “pure play” exposure:
- iShares MSCI South Korea Index Fund (EWY): This ETF tracks the MSCI South Korea Index, a benchmark made up of the largest and most liquid South Korean equities. EWY’s largest holdings include companies that rely heavily on exports; Samsung Electronics and Hyundai Motor each receive significant allocations [also see Three Tech-Heavy International ETFs].
- IQ South Korea Small Cap ETF (SKOR): Unlike EWY, this ETF focuses on small cap companies, thereby offering exposure to companies that tend to rely more heavily on growth in local consumption. SKOR tracks the IQ South Korea Small Cap Index, a benchmark made up of about 100 holdings. Technology accounts for only about 13% of SKOR’s index, compared to about 25% for EWY.
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Disclosure: No positions at time of writing.