[US-China Economic War Series] II. Restructuring the Semiconductor Industry and South Korea's Response Strategy

I. Semiconductors and Economic Security

1. The Rise of Economic Security

Issues of economic security have emerged due to US-China competition, the spread of COVID-19, and the Russia-Ukraine war. In the past, economic security was understood as the necessity of supporting the livelihoods of low-income individuals to maintain social order, or as the idea that sustained economic growth and stability are crucial foundations for national security. Recently, economic security has been discussed primarily in terms of supply chain stability, import/export and investment regulations, responses to economic coercion, and strengthening advanced technological innovation capabilities. However, the content varies by country and scholar, making it difficult to define clearly (Baek Woo-yeol 2022; Golea and Hideg 2022). Economic security is closely related to geo-economics, economic statecraft, industrial policy, mercantilism, and science, technology, and innovation (STI). Traditionally, economic statecraft involves mobilizing economic means to achieve a nation's diplomatic objectives, utilizing measures such as export/import controls, tariffs, asset freezes, and suspension of aid to pressure and inflict tangible damage on other countries (Blackwill and Harris 2016). Economic security can be seen as similar to economic statecraft or geo-economics in that it is based on the interconnectedness of politics, diplomacy, military affairs, and economics. While economic statecraft or geo-economic considerations during the US-Soviet Cold War were attempts to achieve specific political and diplomatic goals by utilizing economic resources in a situation of relatively low economic interdependence, the recent concept of economic security appears to have developed at the intersection of deepening economic interdependence and hegemonic competition within the integrated global economic order following globalization.

Summarizing the differences between the two, first, unlike the limited and unilateral effects of traditional economic statecraft, the use of economic means for diplomatic purposes in a state of heightened economic interdependence is highly effective and reciprocal. Even the disruption of supply chains for simple manufactured goods like urea solution or masks can cause significant chaos in the other country. While export controls can harm the other country, the repercussions on one's own country must also be considered. In this regard, supply chain stability is being discussed as a core issue of economic security. In the context of "weaponized interdependence," most countries are compelled to adopt policies that mitigate their own economic vulnerabilities and respond proactively (Farrell and Newman 2019). Second, advanced technology has become a central agenda in recent economic security discussions. While competition and conflict over advanced technologies have existed between nations in the past, the dual-use nature of advanced technologies has been highlighted by US-China competition, leading to increased competition and containment surrounding technologies that form the basis of military technological innovation. Although there are slight differences depending on the country, current economic security agendas include securing and diversifying supply chains to prepare for supply chain disruption threats (advanced technologies and raw materials), strengthening advanced technological capabilities, regulating technology leakage, and forming technology cooperation partnerships.

2. The Semiconductor Industry and Security

The development of semiconductor technology and industry has closely followed US national security considerations (Bae Young-ja 2020). While the foundations of semiconductor technology, the transistor and integrated circuit, were based on a series of developments in Europe and the United States from the late 19th century onwards, their evolution into an industry is closely linked to the US participation in World War II and subsequent efforts to maintain its military superiority through weapons development (Morris 1990). The first transistor was created at Bell Labs in the US in 1947, a result of interdisciplinary research and development conducted since the end of World War II. Although the invention of the transistor occurred in the private sector, it was based on fundamental research that had rapidly advanced during the war. Around the time of US entry into World War II, focused investment in scientific research for military purposes began under the Office of Science and Research Development (OSRD), established under the leadership of Vannevar Bush, where early forms of semiconductor development were pursued to improve radar performance (Braun and Macdonald 1982). Although the OSRD was dissolved after the war, the legacy of extensive collaboration among researchers across military, industrial, and academic sectors persisted, and this achievement was made possible by direct support from the military, which was interested in the military applications of semiconductor technology.

During the 1950s and 1960s, as the Cold War solidified and the US military advantage over the Soviet Union was emphasized, the Department of Defense actively created demand for semiconductors and supported technological innovation in the private sector. However, from the 1970s onwards, the private electronics industry began to grow rapidly, driving semiconductor demand. As private companies' investment resources and capabilities surpassed those of the military sector, they led the development of the semiconductor industry. Even during the period of private-sector-led semiconductor industry development, the US Department of Defense emphasized and supported the importance of advanced semiconductor chip production from a national security perspective. For example, when concerns were raised about the US semiconductor industry due to challenges from Japan, the Defense Science Board issued a report in 1987 analyzing the threats posed by the erosion of semiconductor manufacturing capabilities and technological superiority, particularly in terms of reduced weapons production capacity. The report recommended that since individual corporate efforts would be insufficient to strengthen advanced semiconductor technology development capabilities, the government and industry should jointly establish a consortium, with the Department of Defense contributing a significant portion of the initial operating funds (Defense Science Board 1987). In accordance with this recommendation, Sematech (Semiconductor Manufacturing Technology), a research consortium involving 14 semiconductor manufacturers with the goal of securing world-class semiconductor manufacturing technology, was launched, centered around the Defense Advanced Research Projects Agency (DARPA).

The semiconductor industry, which originated in the United States, naturally spread to Asia, Europe, and other regions after the 1980s, forming a network involving approximately 20 countries in semiconductor production (Jeong Hyeong-gon 2023). The expansion of the semiconductor production network was driven by the combination of the US's solid dominance in the global military and security order, its strong alliances, and the logic of efficiency gains and cost reductions promoted by globalization. During this process, US national security concerns regarding semiconductor manufacturing receded. Since the 1980s, memory chips began to be manufactured by Japanese and then South Korean companies, and Taiwanese companies specializing in chip manufacturing, such as UMC and TSMC, emerged. Asian companies that manufactured high-quality chips at low costs came to dominate semiconductor manufacturing and packaging, leading to a weakening of US domestic semiconductor manufacturing capabilities ("Semiconductor Industry Association 2023).

With the full-scale intensification of US-China technological conflict, concerns about semiconductor manufacturing technology, which had been dormant, have resurfaced. Simultaneously, the issue of semiconductor supply chain stability has been highlighted due to COVID-19, bringing semiconductors to the forefront as a key economic security issue. Starting with the announcement of 'Made in China 2025' in 2015, China's challenge in advanced technologies has intensified. Concurrently, security concerns have arisen in Taiwan and South Korea, major advanced semiconductor manufacturing countries, emphasizing the need to strengthen US domestic semiconductor manufacturing capabilities. The weakening of US semiconductor manufacturing capabilities is perceived not merely as a decline in industrial competitiveness but as a national security crisis.

As of 2023, over 1 trillion semiconductor chips are produced annually and incorporated into a wide range of products, including smartphones, fighter jets, automobiles, watches, and coffee makers. The semiconductor chip production process, from raw materials to equipment, software, manufacturing, and packaging, involves crossing the borders of approximately 70 countries, traveling over 25,000 miles, with about ten companies playing a leading role in this process (Gupta and Borges 2023). The United States has led the formation and innovation of the semiconductor industry and continues to play the most critical role in the overall semiconductor production network, leveraging its strong dominance in chip design and equipment. Nevertheless, the reliance on Taiwan and South Korea for advanced semiconductor manufacturing, coupled with China's rapid advancement in technological capabilities in this area, is perceived as a threat that could jeopardize the stable supply of semiconductors needed by the United States.

Modern weapon systems and platforms are deeply reliant on semiconductors. Since the 1980s, the US has incorporated smart systems into its weapon systems, establishing overwhelming military superiority over the Soviet Union, with semiconductors playing a crucial role. The US Department of Defense has collaborated with over 75 companies through its 'Trusted Foundry Program' since 2003 to ensure the stable production of military-grade chips, with approximately 2% of military chips reportedly supplied through this program as of 2021 (Shivakumar and Wessner 2022). Military-grade chips often use specialized materials and technologies and have diverse functional requirements, making mass production difficult compared to commercial chips. Furthermore, given the much faster pace of development in commercial chips, the Department of Defense faces limitations in establishing a consistent semiconductor strategy and leading chip development and manufacturing independently. Currently, most military-grade chips are purchased on the market. While the full extent of reliance on overseas production, particularly from Taiwan, for semiconductors used in US weapon systems is difficult to ascertain, it is presumed to be substantial. TSMC supplies chips for various weapons, including F-35s, as well as artificial intelligence chips. For military semiconductors, components like Field-Programmable Gate Arrays (FPGAs) are often enhanced with heat and radiation resistance features.

As of 2023, the United States holds 85% of the global market in chip design, while its manufacturing share is only about 10%. Notably, manufacturing for advanced processes below 7nm is entirely dependent on Taiwan and South Korea. Packaging also accounts for less than 5% of US operations (SIA 2023). This situation leaves the manufacturing and packaging sectors highly vulnerable to supply chain disruptions caused by natural disasters or geopolitical conflicts. Particularly with the intensifying challenge from China in the AI sector, the National Security Commission on Artificial Intelligence (NSCAI) report warned that if the US does not enhance its AI capabilities within a decade, China's AI-based attacks will surpass those of the US (NSCAI 2021). Advanced AI chips, crucial for enhancing AI capabilities, are equipped with chips produced through cutting-edge processes that operate approximately 1,000 times faster and more efficiently than conventional CPUs. The ability to manufacture advanced AI chips domestically and to prevent Chinese companies from importing or manufacturing them is recognized as a critical factor for US security.National Security Commission on Artificial Intelligence:The NSCAI report argued that if the United States fails to enhance its AI capabilities within a decade, China's AI-based attacks will surpass those of the U.S. (NSCAI 2021). State-of-the-art AI chips, a crucial component for enhancing AI capabilities, operate about 1000 times faster and more efficiently than conventional CPUs and are equipped with chips produced through cutting-edge processes. The ability for the United States to manufacture state-of-the-art AI chips domestically, and to prevent Chinese companies from importing or manufacturing advanced AI chips, are recognized as important factors for U.S. security.

Currently, Intel, a US semiconductor manufacturer, produces chips at the 10-7nm level, and 5nm chips are scheduled to be produced at TSMC's Arizona facility starting in 2024. Advanced chips below 3nm are manufactured by Taiwan's TSMC and South Korea's Samsung. Considering the cooperative relationship between Taiwan and the US, the possibility of Taiwan halting chip supply to the US is very low. China is assessed to be one to two generations behind in semiconductor technology compared to the US and faces difficulties in leaping forward without foreign technological assistance. Nevertheless, due to factors such as potential earthquakes in Taiwan, military actions by China, and the possibility of technology transfer to China through third parties, the US government still perceives realistic threats and vulnerabilities in securing advanced chips.

Over the past few decades, China has strengthened its innovation capabilities in semiconductor technology, launching a large-scale semiconductor promotion policy through 'Made in China 2025' in 2015. However, since the inauguration of the Trump administration, US export regulations on advanced semiconductors and equipment to China have been tightened, leading to current difficulties in technological innovation within the advanced semiconductor manufacturing sector. Despite various challenges, China's efforts to achieve semiconductor dominance continue, with Chinese companies making significant strides in areas other than advanced semiconductor manufacturing, such as mature semiconductor chip manufacturing, design, and packaging (Lee Mi-hye 2023). Semiconductors are China's largest import item, and securing advanced semiconductor chips is indispensable for China's military advancement. Therefore, both the government and corporations are continuously striving to enhance their semiconductor technology innovation capabilities.

As semiconductors have become central elements in both the economy and military, and in the Fourth Industrial Revolution and military technological innovation, not only the US and China but also many other countries are actively implementing policies to foster their semiconductor industries and strengthen technological innovation capabilities. Semiconductors hold a significant position in economic security policies.

II. US-China Semiconductor Conflict and Semiconductor Industry Restructuring

1. Development and Current Status of the US-China Semiconductor Conflict

The US has led the trend in economic security perspectives and major policies concerning semiconductors. China established the 'National Integrated Circuit Industry Investment Fund (國家集成電路産業投資基金)' in 2014 to foster its memory and foundry semiconductor sectors and began implementing comprehensive semiconductor industry support policies through 'Made in China 2025' in 2015. Subsequently, a White House report addressing the weakening of the US semiconductor industry's competitiveness was published in the final period of the Obama administration (The White House 2017a).

The report argued that massive subsidies from the Chinese government were distorting the semiconductor market structure and that, amid the weakening of US semiconductor technological innovation momentum, the US government should actively support semiconductor technological innovation through funding for basic research and moonshot projects, as well as talent development. It also advocated for active responses to China's violations of international norms and strengthened export controls in collaboration with allies. Although the report did not introduce the concept of economic security and discussed the overall competitiveness of the semiconductor industry, and the proposals in the report were not fully implemented due to the change in administration, it demonstrates that issues concerning China's challenge and the weakening of US competitiveness in the semiconductor industry were raised from the late Obama administration.

In the Trump administration's 2017 National Security Strategy, economic prosperity (Promote American Prosperity) was presented as one of the four pillars for preserving US core interests, explicitly emphasizing the security dimension of the economy (The White House 2017b). While previous national security strategies also included US economic prosperity, they primarily referred to values such as free trade and global market expansion. In contrast, the Trump administration viewed the economy as a security strategy from an "America First" perspective, aiming to revitalize the US economy through measures like resolving trade imbalances and expanding export opportunities to benefit American workers and businesses. Around the time the strategy was announced, President Trump and senior officials repeatedly used the term "economic security is national security," emphasizing its importance (Garamone 2017; Navarro 2018). Following the COVID-19 outbreak, discussions on reshoring, the idea of bringing back production supply chains for components relocated overseas to the US, led to supply chain stability being included as a major area of economic security. However, the Trump administration's economic security strategy was more reactive to specific issues than systematic.

Specifically regarding semiconductors, the Trump administration criticized China for achieving technological innovation through aggressive mergers and acquisitions of US companies or illegal technology leakage. Consequently, the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018 expanded the scope of review for foreign investments in the US and strengthened the authority of the Committee on Foreign Investment in the United States (CFIUS), beginning to impose restrictions on Chinese capital acquiring US advanced technology companies (Bae Young-ja 2022). This led to a series of rejections, including the acquisition of US semiconductor design company Lattice Semiconductor by Chinese private equity firm Canyon Bridge Capital Partners, Inc. in 2017, the failure of the acquisition of semiconductor test equipment company Xcerra, and the thwarted attempt by Chinese-Singaporean company Broadcom Corporation to acquire Qualcomm in 2018. The most crucial element of the Trump administration's strategy towards China in the semiconductor sector was export controls. Amid intensifying US-China technological competition, the US enacted the Export Control Reform Act (ECRA) in 2018, permanently delegating all legal authority related to export controls to the President and granting the authority to investigate, supervise, regulate, and prohibit US jurisdiction, offshore exports, re-exports, and transfers. Based on this law, the US government repeatedly placed Chinese semiconductor companies such as Fujian Jinhua Integrated Circuit Co., Ltd. and Huawei on its entity list in late 2018, regulating the export of semiconductor equipment and advanced semiconductor chips to them.

The most impactful export restriction measure was the application of the Foreign Direct Product Rule (FDPR) in May 2020. This rule stipulated that even foreign-made products required export licenses from US authorities if they used US technology, software, equipment, or materials, or were produced using such facilities. The practical intent of this measure was to target Huawei. Since 2019, Huawei had been unable to procure US telecommunications semiconductors from companies like Qualcomm, leading it to design chips through its subsidiary HiSilicon and have them manufactured by TSMC. This measure effectively prevented Huawei from obtaining advanced semiconductor chips from TSMC, rendering it unable to release the latest smartphones equipped with them. The US sanctions, which extended beyond regulating exports of equipment or advanced semiconductor chips from US companies to requiring foreign companies like TSMC, which utilize US technology, to obtain permission for transactions with Chinese semiconductor companies, had the effect of slowing down the technological innovation speed of Chinese semiconductor companies and exerting stronger pressure through choke points. Huawei, which had continued to thrive in the mobile phone and telecommunications equipment sectors through workarounds and independent technological innovation despite previous sanctions, suffered significant damage.

Upon taking office, the Biden administration immediately signed Executive Order 14017, initiating a 100-day supply chain review for four key items: semiconductors, batteries, rare earth elements, and pharmaceuticals (The White House 2021). This marked the beginning of efforts to identify and restructure the US position in global supply chains, signaling that the stability and restructuring of global supply chains were recognized as major components of economic security. Subsequently, various policies aimed at strengthening US advanced manufacturing innovation capabilities have been implemented, with an emphasis on cooperation with allies, revealing the broad outlines of the Biden administration's economic security strategy. The Biden administration's National Security Strategy, released in the latter half of 2022, includes content related to economic security, particularly emphasizing the need to secure advanced technology leadership by implementing a modern industrial innovation strategy and cooperating with allies and partners to maintain a competitive edge (The White House 2022). To date, no single document comprehensively outlines the Biden administration's economic security strategy; its key elements can be discerned from measures taken and speeches by key officials (Raimondo 2023; Sullivan 2022; Sullivan 2023).

The Biden administration's economic security strategy primarily focuses on strengthening US advanced manufacturing capabilities, regulating technology exports to China, and promoting cooperation with third countries. These three core strategies are fully reflected in the semiconductor sector. The US Congress enacted the CHIPS and Science Act and the Inflation Reduction Act (IRA) to enhance advanced semiconductor manufacturing technological innovation capabilities. Ahead of the initial implementation of the CHIPS Act, US Secretary of Commerce Gina Raimondo stated in a speech that the law's specific objectives are to establish two new large-scale semiconductor manufacturing clusters in the US by 2030, thereby securing the capability to manufacture advanced semiconductor chips, while also creating a robust semiconductor supplier ecosystem including back-end processes (packaging) and R&D facilities. Furthermore, she emphasized the goal of building a stable supply chain by having US semiconductor fabs produce not only advanced memory chips but also legacy chips used in automobiles and medical devices. Reflecting on the past misjudgment that the US could maintain its advanced technology leadership without manufacturing support, the CHIPS Act carries the historical mission of restoring and advancing the tradition of investing heavily in science and technology, from the founding fathers' emphasis on manufacturing to the Kennedy administration's space exploration initiatives. Despite the negative sentiment towards traditional industrial policy in the US, the CHIPS Act passed with bipartisan support, and numerous US and foreign companies have pledged investments exceeding $200 billion in the semiconductor sector.

In the semiconductor sector, the US is leveraging and building comprehensive frameworks such as the G7 and the Indo-Pacific Economic Framework (IPEF) to strengthen partnerships and cooperation with allies. Simultaneously, it is building cooperation networks with key countries through multilateral cooperation initiatives like Chip 4 and bilateral cooperation with individual nations such as Japan, the Netherlands, and Taiwan. The most significant measures in international cooperation within the semiconductor sector include encouraging South Korean and Taiwanese companies to invest in and build advanced process facilities in the US, and compelling Japanese and Dutch semiconductor equipment companies to join export controls against China. Currently, Samsung and TSMC are constructing advanced semiconductor process facilities in the US. Since the latter half of 2023, ASML Holding N.V. of the Netherlands, and Nikon and Tokyo Electron of Japan have intensified export controls on key semiconductor equipment to China. Additionally, the US signed a Memorandum of Understanding (MOU) with India in 2023 to strengthen cooperation in semiconductor supply chains, supporting India's expanded role in the global semiconductor supply chain. A Memorandum of Cooperation (MOC) was also signed with Malaysia, a hub for back-end semiconductor packaging, to enhance the resilience of the semiconductor supply chain. Through comprehensive international cooperation, the US is securing advanced semiconductor process and back-end facilities domestically, and by strengthening cooperation with Asian countries, it is securing supply chains related to semiconductors and back-end processes, while also requesting major equipment manufacturers to participate in containing exports to China.

The export controls and investment restrictions initiated by the Trump administration have been maintained and expanded under the Biden administration. The US perceives the need to maintain "as large of a lead as possible" over competitors in advanced technology sectors and has particularly expanded export controls on dual-use technologies with military and civilian applications. The most representative measure among the Biden administration's semiconductor export controls was the October 2022 regulation that clearly defined and controlled exports of DRAMs below 18nm, NAND flash memory above 128 layers, and logic chips below 14nm. While previous export controls primarily targeted specific companies, this measure expanded the scope of control by defining the Commerce Control List itself. Given that it targets China as a whole rather than specific companies within China and induces broad controls based on end-use, the impact is inevitably significant.

The Semiconductor Industry Association (SIA), reflecting the positions of its member companies, argued that US export control measures weaken the competitiveness of the US semiconductor industry, undermine supply chain stability, provoke retaliation from China, and ultimately lead to advancements in Chinese semiconductor technology. They requested a moratorium on further regulations (SIA 2023). However, the US government announced supplementary measures to expand its export controls on semiconductors to China in November 2023. It was assessed that China's attempts to circumvent existing export controls had limited the effectiveness of these measures in restricting the enhancement of China's semiconductor industry competitiveness and AI research levels. For instance, Chinese AI companies have been observed using US cloud services or establishing semiconductor manufacturing bases outside the surveillance network. Furthermore, while previous controls targeted equipment using light sources with wavelengths below 193nm (EUV), this expanded measure explicitly includes lithography equipment using light sources with wavelengths of 193nm or greater (DUV) within the scope of export controls, thereby strengthening regulations, particularly for advanced semiconductors related to AI research.

Since the EU clarified in early 2023 that its strategy towards China signifies "de-risking" rather than "decoupling" (von der Leyen 2023), key US officials have also stated that the US strategy towards China is de-risking (Sullivan 2023). Although some anticipate a potential easing of US-China tensions due to visits by US business leaders and officials and the US-China summit, there are no signs of relaxation in semiconductor-related sanctions; rather, the scope of sanctions against China has been expanding and becoming more detailed. Despite debates about the effectiveness of US export controls on semiconductors, particularly regarding reduced sales and R&D investment by US companies, and skepticism about their sustainability, US export controls on semiconductors are expected to continue, be supplemented, and strengthened.

The Department of Commerce, which has primarily focused on regulating advanced semiconductor chips, is now expanding its scope to address the rise of China in the realm of so-called legacy chips, or general-purpose semiconductors. While US sanctions against China have concentrated on advanced sectors, the Congressional Research Service (CRS) pointed out that the segment below 28nm, which has been somewhat excluded from sanctions, represents a strategic loophole (CRS 2023). The US House Select Committee on the CCP also urged action on China's general-purpose semiconductors (<Yonhap News> 2024/01/09). They argued, "Urgent measures are needed to prevent China from dominating general-purpose semiconductors, which could give it excessive influence over the global economy," and warned that "if the US becomes dependent on Chinese general-purpose semiconductors, US economic and military well-being could be at risk of excessive dependence on the Chinese Communist Party." Secretary Raimondo also stated, "Responding to foreign non-market actions that threaten the US general-purpose semiconductor supply chain is a matter of US national security."

The Department of Commerce announced that it plans to conduct a broad survey in January 2024 targeting over 100 US companies in sectors such as automotive, aerospace, and defense to understand how they procure general-purpose semiconductors. The concern is that if a situation similar to China's past dominance in steel and solar power, achieved through price competitiveness, unfolds in the general-purpose semiconductor sector, it could pose a security risk. Preventing China's rise and maintaining US control in the general-purpose semiconductor market is a highly challenging task. While specific discussions will likely follow the survey results, potential US measures to sanction China's general-purpose semiconductor supply could include tariffs, anti-dumping duties, and safeguards. Following the announcement of the Department of Commerce's survey on general-purpose semiconductors, China's Ministry of Commerce and Ministry of Science and Technology announced the prohibition of exports related to four technologies concerning rare earth refining, processing, and utilization through a public notice on amendments to the list of technologies subject to export prohibition and restriction.

Semiconductors, artificial intelligence, and quantum computing are crucial means for realizing the "China Dream." In 2019, the rapid progress of three companies—Fujian Jinhua, Changxin Memory, and Hefei Changxin—was predicted to mark the beginning of China's memory semiconductor production year. However, restrictions on equipment imports from the US caused significant setbacks (Bae Young-ja 2022). In response to the US's intensified export controls, China stated, "They are weaponizing trade and technology issues," and "We urge them to immediately cease their erroneous actions." China also declared, "China will take all necessary measures to resolutely protect the legitimate rights of Chinese companies." However, China's options were limited, and its response has largely followed two main paths.

Second, it strengthens various support measures for technological self-reliance. Following US export controls, China has created specific technology lists and is providing focused support, moving towards the goal of self-reliance in its technological and industrial ecosystem. In 2023, the "Central Science and Technology Commission" was established under the Chinese Communist Party to lead science and technology policies. Xi Jinping emphasized at a meeting with regional representatives at the National People's Congress that "whether we can fully build a strong socialist modernized country as planned depends on the self-reliance and self-strengthening of science and technology," reflecting the Party Central's intention to directly lead efforts to achieve scientific and technological self-reliance (Lee Mi-hye 2023). China is preparing its third semiconductor fund, valued at 300 billion yuan, surpassing the previous funds of 140 billion yuan (2014) and 200 billion yuan (2019), and it is known to specifically support semiconductor manufacturing equipment. Facing difficulties in the advanced semiconductor sector, China is focusing on fostering general-purpose semiconductors, which have lower added value but explosive demand due to the growth of electric vehicles and the Internet of Things, as well as advanced packaging, and achieving self-reliance in equipment and software. Although challenging, if the US begins to exert pressure on general-purpose semiconductors in 2024, as it has on advanced semiconductors, China's response, having already secured a certain level of market dominance, will be closely watched.

In 2023, Huawei attracted attention by releasing its latest premium smartphone, the Mate 60 Pro, equipped with a self-developed 7nm processor chip. While it is currently difficult for China to mass-produce advanced semiconductor chips at a reasonable cost, the manufacturing of advanced semiconductor chips is a card that China absolutely cannot afford to give up. This event demonstrates the desperate efforts of Chinese companies despite strong US containment. China's goals in the semiconductor sector are to ensure a stable supply of advanced semiconductor chips, continuously upgrade its value chain in semiconductor manufacturing and equipment, and catch up with South Korean and Taiwanese companies to manufacture advanced semiconductors domestically. Achieving these goals is not easy, but it is not impossible, and it is evident that China will continue to strive towards them. The speed at which China can achieve this is crucial.

The keywords of the Biden administration's economic security policy are supply chains and advanced technologies, pursued through the so-called 3P policy: promotion of advanced technology capabilities, protection through export controls, and partnership via technological alliances. Looking ahead at the conflict surrounding semiconductors, one of the most significant variables will be the US presidential election in 2024. If a Republican administration takes office, export controls will likely continue, but there could be significant changes in the aspects of advanced manufacturing support and technological alliances. For the US to contain China and maintain its advanced technology superiority, the 3P policies must operate as a cohesive set; if even one pillar collapses, the outcome is likely to favor China. Even if the 3P policies continue, challenges such as the effectiveness of subsidy payments, growing fatigue or backlash against export controls, and differing national interests among allies will emerge, necessitating the exploration of long-term solutions for implementing these policies. For China, the question remains whether its support policies and efforts for strengthening technological innovation capabilities and achieving self-reliance will yield effective results. Amidst the strengthening of Xi Jinping's and the Communist Party's power, there are doubts about whether this can coexist with the promotion of market vitality and a socio-cultural environment conducive to technological innovation. China is currently at a historical juncture, facing the challenge of finding a proper balance between these elements and embarking on an unprecedented path.

2. Semiconductor Industry Restructuring and Future Outlook

The semiconductor supply chain has been restructured due to export controls on advanced semiconductor chips and equipment to China by the US and its allies, and increased investment in the semiconductor sector by various countries. In particular, semiconductor fabrication and back-end processes are rapidly changing (Lee Mi-hye 2023; Jeong Hyeong-gon 2023, etc.). Intel in the US and Rapidus in Japan have challenged the advanced process segment, which was previously concentrated in Taiwan's TSMC and South Korea's Samsung Electronics. TSMC, Samsung Electronics, and Intel are preparing for mass production of 2nm chips between 2024-2025, while Rapidus aims for 2nm mass production by 2027. Therefore, the advanced process segment is expected to maintain a three-way dominance among TSMC, Samsung Electronics, and Intel for the time being, with potential diversification into a four-way competition if Rapidus achieves mass production success. In the mature process segment producing general-purpose semiconductors, China's production capacity is expected to expand, and India has also emerged as a contender. Specifically, China accounts for approximately 27% and 30% of the manufacturing of general-purpose semiconductors in the 20-45nm and 50-180nm ranges, respectively, and this proportion is expected to increase rapidly in the future. Memory semiconductor production is led by South Korea's Samsung Electronics and SK Hynix, with competition from Micron (US), Kioxia (Japan), and YMTC (China). Due to US restrictions on China, the growth of South Korean companies' foundry production capacity in China and the expansion of Chinese companies are limited, suggesting no significant changes in the memory market for the time being. Micron, which has historically relied on Japan and Taiwan for DRAM and Singapore for NAND flash memory, plans to expand its US production share from the current 10% to 40% by investing in facilities in Idaho and New York, supported by the US CHIPS Act. Once Micron's US foundry establishment stabilizes, memory chip production bases are expected to diversify. Back-end packaging has been concentrated in China, Taiwan, and South Korea, with production bases expanding to India and Southeast Asia. Amidst a surge in investment in advanced packaging, a key topic in current semiconductor processes, the US is increasing domestic investment in advanced packaging while pursuing strategies to enhance production capacity and ensure supply chain stability for traditional packaging through cooperation with Indo-Pacific Economic Framework (IPEF) participating countries, Malaysia, Vietnam, and the Philippines. In the semiconductor equipment sector, the US, Japan, the Netherlands, and Singapore currently lead, and this is expected to continue for the foreseeable future. Despite rapid improvements in competitiveness across all semiconductor sectors over the past two decades, China remains vulnerable, particularly in the semiconductor equipment segment.

When looking at the semiconductor industry from a longer-term perspective, several factors are crucial: the continuation of US export controls on China, the sustained cooperation among the US and its allies, the successful establishment of advanced manufacturing processes in the US through the effects of the US CHIPS Act, and the impact of Chinese companies' efforts in semiconductor technology innovation and government support. In terms of content, the key issues are how long the bloc-ization of the semiconductor supply chain and US dominance will last, and how quickly China's semiconductor technological innovation will catch up (Diamond et al. 2023). Given that US export controls on semiconductors have continuously expanded in the advanced chip and equipment sectors and are now showing signs of extending to the general-purpose chip sector, it appears unlikely that the trend of US export controls and semiconductor supply chain bloc-ization will ease. However, on the other hand, the extent to which the continuous expansion of export controls is feasible is noteworthy, considering the decrease in sales and R&D investment by US semiconductor companies due to the shrinking Chinese market. Depending on the outcome of the 2024 US presidential election, the sustained support effects of the CHIPS Act and the nature of cooperation with allies could change.

The success of Chinese government support and Chinese companies' innovation efforts also faces various obstacles and variables. Considering these circumstances, the first possible scenario is that advanced manufacturing and advanced packaging in the US will be established to a certain extent by 2030, as currently planned by the US, while China's advanced semiconductor technological innovation continues to lag, leading to the coexistence of a US-led advanced semiconductor supply chain and a China-led general-purpose semiconductor supply chain. Second, China rapidly advances technological innovation in advanced semiconductor processes and equipment, playing a significant role in both advanced and general-purpose semiconductor sectors, leading to the bloc-ization of the entire semiconductor supply chain. Other possibilities include China failing to expand further even in the general-purpose semiconductor sector or being completely excluded from the US-led supply chain, although the likelihood of these scenarios materializing is low. From the US perspective, it might be more advantageous for China to play a role in the general-purpose semiconductor sector and remain dependent on the US, rather than being completely excluded from the semiconductor supply chain. From China's perspective, the ideal situation would be to be able to produce or import advanced semiconductor processes and equipment independently. The critical factor is the sustainability of US dominance in advanced semiconductor processes and equipment, and ultimately, the industrial policies, technological innovation capabilities, and international cooperation of both countries will determine the outcome.

III. South Korea's Response Strategy

In response to the rise of economic and technological security due to US-China technological competition, countries are currently developing various policies. While the specific content of these strategies varies slightly by country, they generally focus on keywords such as supply chains and advanced technologies, including enhancing advanced technological capabilities, strengthening supply chain security, and reinforcing technological alliances. South Korea is also responding by actively supporting advanced technologies, particularly semiconductors, establishing monitoring and response systems to ensure supply chain security, and engaging in US-South Korea advanced technology cooperation.

South Korea and the United States signed a Science and Technology Cooperation Agreement in 1992 and have since held joint science and technology committee meetings to explore cooperation agendas. On a specific technology level, the US-Korea Atomic Energy Agreement has been in place, facilitating ongoing cooperation between the two countries. With the intensification of US-China technological conflict, a consensus has emerged that low-level, intermittent cooperation needs to evolve into more strategic and sustained collaboration. Currently, cooperation with the US is strengthening through various channels, particularly in advanced technology sectors, expanding the security-centric US-ROK alliance into the technological domain. Samsung is proceeding with its investment in US semiconductor foundries, cooperation in quantum information science and technology has been established, and the Artemis Accords have been signed. Recently, the Next Generation Critical and Emerging Technologies Dialogue was established to agree on advancing cooperation in areas such as semiconductors, artificial intelligence, and quantum computing. Cooperation between public and private research institutions is being strengthened, including the establishment of the US National Semiconductor Technology Center (NSTC) and the Korea Advanced Semiconductor Technology Center (ASTC). Opportunities for joint research support between the Ministry of Science and ICT and the US National Science Foundation are being expanded. In the AI field, the US will cooperate with South Korea on the Mini AI Video Summit, the AI Global Forum, and the High-Level Meeting on Responsible Artificial Intelligence in the Military Domain (REAIM), which South Korea is scheduled to host next year. An AI working group will be formed to discuss international standards, joint research, and policy interoperability.

Strengthening cooperation with the US in the semiconductor sector is not an option but a necessity. The US holds overwhelming influence in semiconductor and AI technologies, making it impossible to enhance South Korea's semiconductor and AI technological innovation capabilities without cooperation with US companies. While centering cooperation on the US is natural, finding mutually beneficial exchanges is challenging given the US's overwhelming dominance. To ensure that cooperation is substantive rather than merely formal, South Korea must proactively seek, propose, and develop cooperation agendas. Furthermore, it is essential to recognize that the interests of both countries do not always align in every area and to accurately identify what South Korea aims to achieve through cooperation and what requires a response. For example, long-term consideration is needed regarding which sectors of South Korean semiconductor companies can maintain their competitiveness when the US becomes the center of semiconductor manufacturing. US advanced technology policies exert significant influence beyond its borders, necessitating precise monitoring and an upgraded level of information and negotiation capabilities, along with the establishment of a public-private cooperation system, to protect the interests of South Korean companies on a case-by-case basis.

Strengthening cooperation with the US is creating difficulties in relations with China in the semiconductor sector. Given that advanced technology sectors like semiconductors and AI are closely linked to military technology, a core element of US-China strategic competition, the trend of US-China decoupling is unlikely to ease. While strengthening advanced technology cooperation with the US, it is necessary to make efforts to continue cooperation with China in areas such as general-purpose semiconductors and basic research, and it is important to convey this message cautiously. Both the US and China are making efforts to maintain various forms of communication rather than extreme confrontation. South Korea should also continue its diplomatic engagement with China by leveraging networks of China experts and pro-China politicians and economists through a division of roles.

Multilateral diplomacy in the semiconductor sector must be strengthened to ensure that enhanced US-ROK cooperation does not lead to weakened cooperation with other countries. Currently, mutual cooperation is strengthening among Taiwan, Japan, and the EU, centered around the US in the semiconductor sector. As companies from each country make cross-investments, a US-Japan-Taiwan lineup is forming. While it is correct for South Korea's cooperation to be centered on the US, it is necessary to build a more proactive and simultaneous multilateral cooperation system to complement this. For example, South Korea and Japan have laid the groundwork for cooperation through the lifting of export restrictions between the two countries in 2023, and measures are being sought to expand and stabilize the semiconductor supply chain by strengthening collaboration between South Korean semiconductor companies and Japanese material, component, and equipment manufacturers. Samsung Electronics is pursuing the establishment of a semiconductor R&D and prototyping line in Yokohama, Japan; such bilateral cooperation must continue. Beyond Japan, active efforts should be made to seek cooperation agendas and develop collaborations with Taiwan, the EU, India, and Indo-Pacific countries.

Currently, many countries, including the US, Japan, and China, have established extensive support policies for their semiconductor industries. For example, in the US, companies receive a 25% tax credit for semiconductor factory investments regardless of company size, and $52 billion (approximately 73 trillion won) is provided for semiconductor facility investment and R&D. The EU has also established the "European Chips Act," creating a public-private investment fund of €43 billion (approximately 59 trillion won) to expand semiconductor production. Japan's government is providing 70 billion yen (approximately 665 billion won) and has supported the establishment of "Rapidus," an advanced semiconductor company formed by leading Japanese companies such as Sony, Toyota, and Kioxia. Additionally, approximately 40% of semiconductor company facility investments are subsidized, and TSMC is building a semiconductor plant with this support. South Korea has also established the "K-Chips Act" to foster the semiconductor industry, providing tax credits of 15% for large corporations and 25% for mid-sized corporations on facility investments in national strategic industries such as semiconductors, secondary batteries, vaccines, and displays. However, the scale and method of support for South Korea's semiconductor sector still fall short compared to other countries. Furthermore, in the era of US-China technological competition, strengthening semiconductor technological capabilities and establishing and supporting diplomatic frameworks for this purpose are crucial, requiring a more strategic and long-term semiconductor diplomacy. Despite our semiconductor technology being our most important diplomatic asset, a significant gap still exists between technology and diplomacy in South Korea. Leadership and execution are needed to integrate semiconductor content and the framework of diplomacy, allowing them to converge and be unified around South Korea's enhanced global political standing and vision. ■

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■ Bae, Young-ja_Professor, Department of Political Science and International Relations, Konkuk University.

■ Responsible for and edited by: Lee, Ju-yeon_EAI Research Fellow

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