[EAI Dialogue] The US-China Semiconductor War and Korea's Choice

■ President Son Yeol: Through the CHIPS and Science Act passed in August last year, the Biden administration plans to invest approximately 50 trillion won to foster the semiconductor manufacturing sector, where the US is currently weak. This is a strategy to dramatically reverse the trend where the US's overwhelming dominance, which accounted for 40% of global chip production in the 1990s, has fallen to about 10% today.

The US does not view semiconductors as merely an advanced industry. If semiconductors were the 'rice of industry' in the past, they are now 'infrastructure,' as President Biden put it. They are a technology and industry that forms the core foundation of the national economy and the bedrock of national security. Therefore, this legislation should be understood as having three intentions: first, to restore the competitiveness of the US semiconductor manufacturing sector; second, to strengthen the US supply chain, particularly through 'friendshoring' with countries where key companies are located, such as Korea, Taiwan, Japan, and the Netherlands; and third, to increase pressure on China and curb the advancement of its semiconductor industry.

The question arises whether the US can achieve these three objectives simultaneously, what challenges Korean companies with production bases in China will face, and how Korea should respond. First, what is the impact of US semiconductor policy on major semiconductor manufacturing countries like Korea and the global economic order?

■ Ambassador Lee Jae-min: From the US perspective, semiconductors are crucial for maintaining its economic advantage in the digital age. Having lost its lead in various semiconductor sectors, the US has long discussed countermeasures such as supply chain reorganization, subsidies, or sanctions on companies trading with China, and domestic companies and the government have consistently prepared for this.

However, what makes the current situation different from the past is that US policies are being prepared and presented too aggressively and hastily. The US also appears to be quite taken aback by the strong reactions from related countries and negative domestic public opinion. Therefore, while the US seems to be considering finding appropriate compromises, the fact that it has repeatedly taken such actions, as seen in the case of the Inflation Reduction Act (IRA), is concerning.

It appears that the US is currently pursuing its policies not with a precise roadmap or plan, but by hastily deciding on various policy tools for short-term goals, operating the system experimentally, and making adjustments as it goes through trial and error. This will ultimately lead to uncertainty in the market and international relations, and inflict fatal damage on businesses.

Even if issues like the CHIPS Act and the IRA are resolved through some compromise, the repeated emergence of such issues amplifies the concerns of companies and governments looking at the US. Instability in the entire market, not due to market competition but due to the uncertainty of US government policy, will cause significant problems for the semiconductor industry going forward.

■ Professor Bae Young-ja: If the 'guardrail provisions' of the CHIPS Act are implemented, Korean companies will be unable to make significant new investments in China for 10 years, leading to a gradual reduction in production facilities operated by Korean companies in China and investments in China. Furthermore, provisions such as 'clawback of excess profits' and 'access to production facilities' stipulated in the CHIPS Act will have a significantly negative impact on companies like Samsung and SK Hynix, which operate a tripartite system centered in Korea with bases in China and the US.

Within the US, there has been ongoing debate about why subsidies provided with US taxpayer money should be given to foreign companies. In response, the US government has expressed its commitment to prioritizing its own economic security and has introduced strict policies. Ultimately, the US expects certain contributions from Korean companies in its pursuit of regaining manufacturing competitiveness.

Korean companies must continue to communicate with the US, aiming to maintain their competitiveness in existing manufacturing sectors while preserving their relationship with the US and securing corporate profits. It is urgent to adjust and negotiate in a direction that aligns with the growth of Korean companies and national interests.

The semiconductor subsidies are not a one-time investment but will be a long-term commitment, and much of the process will be politically determined, suggesting that this announcement of support is just the beginning.

■ President Son Yeol: If the US subsidy policy excessively restricts corporate activities, are there no options for Korean companies other than not applying for the subsidies?

■ Professor Bae Young-ja: Samsung and SK Hynix, which have decided to make large-scale new facility investments in the US, would incur losses if they do not receive US subsidies, making it virtually impossible not to apply. Subsidies are necessary because securing labor in the US is difficult, and environmental and disposal costs are high. Since subsidies cover approximately 20% to 30% of the additional costs, investments cannot proceed without discussions about subsidies.

■ Ambassador Lee Jae-min: When a government requests and attracts investment from companies, deregulation and subsidies are major components, typically presented as a 'total package' to foreign investors. While there are conditions for subsidies, these have historically been conditions for receiving them, not regulations for joint operation or data sharing. Therefore, all companies would have been surprised by the US subsidy policy. Consequently, the current US policy is difficult to view as a standard subsidy, and adjustments will be necessary in the future.

The clawback of excess profits is also difficult to define conceptually, and determining excess profits often leads to legal issues. It is difficult to assess profits in a market with such wide fluctuations as the semiconductor industry, and clawing back excess profits, while numerically possible, is unrealistic.

■ President Son Yeol: If the CHIPS Act is implemented largely in its current form, is a full-scale US-China decoupling anticipated?

■ Professor Bae Young-ja: Decoupling is impossible and unnecessary in the overall picture. However, decoupling is already underway in the advanced chip manufacturing sector, and if the US's 'guardrail provisions' are realized, production facilities in China will not be able to upgrade properly, leading to a natural decoupling.

The biggest problem that decoupling from China poses for Korea is the need to consider how to maintain the production facilities of domestic companies in China or how to seek a smooth exit strategy.

The announcement of the CHIPS Act's implementation clearly states that it will apply equally to foreign companies as well as Korean companies, necessitating renegotiation. Furthermore, as US regulations show a trend of expanding beyond semiconductors to other advanced technologies such as artificial intelligence and quantum computing, decoupling and corresponding response strategies will continue to be discussed.

■ Ambassador Lee Jae-min: 'Decoupling' has various spectrums, leading to diverse reactions regarding the possibility of decoupling by product and sector. From this perspective, core semiconductor sectors are crucial items for the digital age from the US standpoint. Therefore, as long as the US maintains its current policy towards China, it will inevitably move towards decoupling. The US can be interpreted as currently experimenting with various approaches to implement this policy.

If the US diligently engages in continuous consultation and coordination with neighboring semiconductor-producing countries to formulate new measures, it will be able to maintain a superior position over China in the core semiconductor sector in the long term. China will remain a major producer, but the US is expected to lead the market by maintaining a certain distance, controlling the core semiconductor and R&D sectors.

■ President Son Yeol: The US goal of securing semiconductor manufacturing competitiveness and the goal of containing China are not the same. Deterring China's growth does not necessarily mean the US will achieve dominance in manufacturing. If the current legislation is implemented as is, will the US be able to achieve manufacturing competitiveness?

■ Professor Bae Young-ja: Initially, I was skeptical when the US declared its intention to lead in advanced semiconductor manufacturing and invited TSMC and Samsung. Given the characteristics of the US economic system, many questioned how advanced manufacturing could be achieved amidst higher production costs and a lack of skilled labor. Semiconductor manufacturing is not at all aligned with US strengths, but seeing the strong push driven by government initiatives and the domestic US atmosphere, I believe there will be some impact, though it is too early to predict success or failure.

For this policy to succeed, long-term investment beyond five years is necessary, and to sustain such investment, domestic US political factors like elections are crucial. If these conditions are met, there is no reason why the US cannot surpass China and maintain its dominance.

■ Ambassador Lee Jae-min: I agree. The US venturing into semiconductor manufacturing is a very challenging task. They are introducing various policies to overcome diverse challenges, and we must wait and see how effectively the policy will and support function.

■ President Son Yeol: Korea, which relies on US technology while also depending on the Chinese market, faces a significant dilemma. How should the government and corporations respond going forward?

■ Ambassador Lee Jae-min: Until now, we have dealt with such issues on a case-by-case, issue-by-issue, and company-by-company basis. When a problem arises, we solve it, and when the next problem occurs, we focus on that. Now, we need to discuss these issues within a larger framework as a 'package deal,' or establish a basic agreement and then address specific issues that arise within that framework.

Furthermore, we must persuade the US that it is difficult to find a partner like Korea when formulating new norms in the semiconductor sector, thereby creating a win-win framework between Korea and the US. Currently, Korea always follows what the US wants, leading to insufficient profit capture and high costs. This is an area that requires continuous consideration, discussion, and consultation going forward.

■ Professor Bae Young-ja:Regarding economic security, South Korea has three major agendas. First is 'crisis management' to respond when issues arise in the short term, second is 'alliance' to foster cooperation with other countries, and third is the 'vision' that must be presented to maintain Korea's technological competitiveness. Amidst expanding regulations on China, the South Korean government and corporations are currently responding together. Meanwhile, when considering alliances, managing de-sinicization is very important, and efforts are being made to expand cooperation with third countries.

In the future, when responding to these policies, South Korea must draw a picture that connects a visible vision to concrete goals and implementation status. For example, the 'vision paper' published by the United States in relation to the CHIPS Act describes in detail the vision the country aims to achieve, from specific enforcement decrees to the big picture. Realistically, not all of these goals and visions may be achieved, but it is a systematic document that emerged from the process of desperately seeking solutions to problems. Economic security requires inter-agency cooperation as it involves investment, crisis management, and long-term alliance management. Furthermore, cooperation among the private sector, experts, and corporations is crucial, and various stakeholders must actively discuss the main agendas of economic security and the establishment of governance to build a system that can respond to issues in the long term, not just as a one-off measure. ■

■ Author: Bae Young-ja_Professor of Political Science and International Relations, Konkuk University. She graduated from Seoul National University with a degree in Diplomacy and received her Ph.D. in Political Science from the University of North Carolina at Chapel Hill. Her main research areas include international political economy, political economy of foreign investment, science and technology and international politics, the internet and international politics, and science and technology diplomacy. Her major publications include "Research on the World Politics of Science and Technology: Current Status and Prospects" (2021), "International Political Hegemony and Technological Innovation: The Case of US Semiconductor Technology" (2020), "The Rise of Chinese Internet Companies and Internet Sovereignty" (2018), "US-China Hegemonic Competition and Scientific and Technological Innovation" (2016), and "Science and Technology and Public Diplomacy" (2013).

■ Author: Lee Jae-min_Ambassador for Economic Security and Professor at Seoul National University College of Law and Law School. He obtained his Bachelor of Laws, Master of Laws, and Ph.D. in Law from Seoul National University College of Law, and received his Juris Doctor from Boston College Law School and Master of Laws (LL.M.) from Georgetown Law Center. He worked at the Ministry of Foreign Affairs after passing the 26th Foreign Service Examination. He worked as an attorney at Willkie Farr & Gallagher LLP in Washington D.C. and previously served as a professor at Hanyang University College of Law and Law School. His main research area is international law (international trade law, international investment law).

■ Author: Son Yeol_Director of EAI and Professor at Yonsei University Graduate School of International Studies. He received his Ph.D. in Political Science from the University of Chicago. He previously taught at Chung-Ang University and is currently a professor at Yonsei University Graduate School of International Studies and the Director of the East Asia Institute (EAI). He has served as Dean of Yonsei University Graduate School of International Studies, Head of Underwood International College, Director of the Institute for Sustainable Development, and Director of the Institute for International Studies. He was a Visiting Professor at the University of Tokyo, the University of North Carolina (Chapel Hill), and the University of California (Berkeley). He served as President of the Korean Political Science Association (2019) and President of the Korean Association for Japanese Studies (2012). He has been a Senior Fellow at Fulbright, MacArthur, the Japan Foundation, and Waseda University’s Institute for Advanced Study. He has also served as a consultant for the Ministry of Foreign Affairs, the Korea National Diplomatic Academy, the Northeast Asian History Foundation, and the Korea Foundation, and as a specialist committee member for the Committee for the Northeast Asian Era. His areas of expertise include Japanese foreign policy, international political economy, East Asian international politics, and public diplomacy. His recent publications include "Conditions for Presidential Success in 2022" (co-editor, 2021), "Policy Recommendations for the New Government's Foreign Policy in 2022" (co-editor, 2021), "The Global Appeal of BTS" (co-editor, 2021), "Korea's Choices After the Crisis" (co-editor, 2021), "Japan and Asia's Contested Order" (2019, with T. J. Pempel), "Understanding Public Diplomacy in East Asia" (2016, with Jan Melissen), "South Korea under US-China Rivalry: the Dynamics of the Economic-Security Nexus in the Trade Policymaking," The Pacific Review 23, 6 (2019), and "Middle Power Diplomacy of Korea" (co-editor, 2017).

■ Responsible for and Editing: Park Ji-soo, EAI Research Assistant

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