[EAI Debate] 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 of the US's overwhelming dominance, which once accounted for 40% of global chip production in the 1990s, but has now fallen to about 10%.

The US does not view semiconductors merely as an advanced industry. If semiconductors were the 'rice of industry' in the past, they are now 'infrastructure,' as President Biden puts it. They are a technology and industry that form the core foundation of the national economy and the basis of national security. Therefore, this legislation should be seen 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 China's semiconductor industry.

Will the US be able to catch all three of these rabbits simultaneously? Given that it is expected to cause considerable difficulties for Korean companies with production bases in China, what should Korea's choice be? Several questions arise. 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 a crucial item for maintaining its economic advantage in the digital age. Having lost its lead in various semiconductor fields, the US has long discussed countermeasures such as supply chain reorganization, subsidies, or sanctions against 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 flustered by the strong reactions from related countries and negative domestic public opinion. Therefore, while the US seems to be considering finding appropriate compromise points, the fact that the US has repeatedly taken such measures, as seen in the case of the Inflation Reduction Act (IRA), is concerning.

It appears that the US is not pursuing its policies with a precise roadmap or plan, but rather is opting for a path of trial and error by hastily deciding on various policy tools for short-term goals and operating the system experimentally, making adjustments as needed. 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 these issues amplifies the concerns of companies and governments looking at the US. Instability in the entire market due to the uncertainty of US government policy, rather than uncertainty from market competition, will cause significant problems for the semiconductor industry going forward.

■ Professor Bae Young-ja: If the 'guardrail provision' of the CHIPS Act is 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 their investments in China. Furthermore, provisions such as the '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 trilateral 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 intention to prioritize its own economic security and has introduced strict policies. Ultimately, the US expects something from Korean companies in its process of restoring manufacturing competitiveness.

In response, Korean companies must continue to communicate with the goal of maintaining their competitiveness in existing manufacturing sectors, preserving their relationship with the US, and securing corporate profits. It is urgent to adjust and negotiate in a way that aligns the growth of Korean companies with national interests.

The provision of semiconductor subsidies this time will not be a one-off investment but a long-term one, and much of it will have to be decided politically in the process, so this announcement of support is likely just the beginning.

■ President Son Yeol: If the US subsidy policy excessively restricts corporate activities, are there no options for Korean companies to refuse the subsidies?

■ Professor Bae Young-ja: For Samsung and SK Hynix, which have decided to make large-scale new facility investments in the US, it is practically impossible not to apply for subsidies, as they would have to operate at a loss without them. Subsidies are necessary because securing labor in the US is difficult, and environmental and processing costs are high. Since subsidies cover about 20% to 30% of the excess costs, investment 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, and it is common to present these as a 'total package' to foreign investors. Of course, there are conditions for subsidies, but these are conditions for receiving them, not regulations for joint operation or data sharing. Therefore, all companies would have been very surprised by the US subsidy policy this time. Consequently, the current US policy is difficult to consider as a general subsidy, and adjustments will be necessary in the future.

The clawback of excess profits is also difficult to define conceptually, and there are often legal issues in determining whether profits are excess. It is not easy to determine profits in a market with wide fluctuations like 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 'guardrail provision' proposed by the US is realized, production facilities in China will not be able to be upgraded properly, leading to 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 response strategies to it will continue to be discussed.

■ Ambassador Lee Jae-min:'Decoupling' has various spectrums, so different reactions emerge regarding the possibility of decoupling by product and sector. From this perspective, the core semiconductor sector is a key item for the digital age from the US perspective. Therefore, as long as the US maintains its current policy towards China, it will inevitably lead to decoupling. It can be interpreted that the US is currently conducting various experiments in the process of implementing 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 an advantage 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 in core semiconductors and R&D, maintaining a certain distance under US control.

■ President Son Yeol: The US goal of securing competitiveness in semiconductor manufacturing is not the same as its goal of containing China. Preventing 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 achieve competitiveness in manufacturing?

■ Professor Bae Young-ja: Initially, I was skeptical when the US announced 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 labor. Semiconductor manufacturing is not at all aligned with US strengths, but seeing the strong push driven by government initiatives and the domestic atmosphere in the US, I believe there will be some impact, but 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 politics, such as elections, are important for support. If these conditions are met, I see no reason why the US would not be able to maintain its dominance, surpassing China.

■ Ambassador Lee Jae-min: I agree. For the US to engage in semiconductor manufacturing is a very difficult task. They are introducing various policies to overcome diverse challenges, and we will have to wait and see how well the policy will and support function.

■ President Son Yeol: Korea, which relies on US technology while also depending on the Chinese market, faces a huge dilemma. How should the government and companies respond in the future?

■ 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 arises, we focus on that next problem. This situation has continued. Now, we need to discuss these issues in a broader picture as a 'package deal,' or reach a basic agreement and then find solutions together for specific issues that arise within that framework.

Furthermore, we must persuade the US that it is difficult to find a partner like Korea when it seeks to establish new norms in the semiconductor sector, and create a win-win framework between Korea and the US. Currently, Korea always follows what the US wants, resulting in insufficient profit gains and high costs. This is an area that requires continuous thought, discussion, and consultation going forward.

■ Profesora Bae Young-ja: En relación con la seguridad económica, Corea tiene tres agendas principales. La primera es la 'gestión de crisis' para responder cuando surgen problemas a corto plazo; la segunda es la 'alianza' para buscar la cooperación con otros países; y la tercera es la 'visión' que debe presentarse para mantener la competitividad tecnológica de Corea. En una situación en la que las regulaciones contra China se expanden cada vez más, el gobierno y las empresas de Corea están respondiendo conjuntamente de inmediato. Por otro lado, al considerar las alianzas, es muy importante gestionar la desvinculación de China y también se están realizando esfuerzos para ampliar la cooperación con terceros países.

En el futuro, al responder a estas políticas, Corea debe trazar un plan que conecte desde una visión tangible hasta objetivos específicos y la situación de implementación. Por ejemplo, el 'documento de visión' publicado por Estados Unidos en relación con la Ley de Chips describe en detalle la visión que su país pretende lograr, desde las órdenes de implementación específicas hasta el panorama general. Si bien es poco realista que todos estos objetivos y visiones se logren por completo, se considera un documento sistemático que surgió del proceso de búsqueda desesperada de soluciones al problema. La seguridad económica requiere cooperación interdepartamental, ya que implica inversión, gestión de crisis y gestión de alianzas a largo plazo. Además, la cooperación entre el sector privado, los expertos y las empresas es importante, y se debe construir un sistema que pueda responder a los problemas a largo plazo, no solo de forma puntual, mediante una discusión activa entre las diversas partes interesadas sobre las principales agendas y la construcción de la gobernanza de la seguridad económica. ■

■ Autor: Bae Young-ja_Profesora del Departamento de Ciencias Políticas y Relaciones Internacionales de la Universidad Konkuk. Se licenció en Relaciones Internacionales en la Universidad Nacional de Seúl y obtuvo un doctorado en Ciencias Políticas en la Universidad de Carolina del Norte en Chapel Hill. Sus principales áreas de investigación son la economía política internacional, la economía política de la inversión extranjera, la ciencia y tecnología y las relaciones internacionales, Internet y las relaciones internacionales, y la diplomacia científica y tecnológica. Sus publicaciones recientes incluyen "Estudio sobre la política mundial de la ciencia y la tecnología: estado actual y perspectivas" (2021), "Hegemonía en las relaciones internacionales y la innovación tecnológica: el caso de la tecnología de semiconductores de EE. UU." (2020), "El auge de las empresas de Internet chinas y la soberanía de Internet" (2018), "Competencia hegemónica entre EE. UU. y China y la innovación científico-tecnológica" (2016), "Ciencia, tecnología y diplomacia pública" (2013).

■ Autor: Lee Jae-min_Embajador de Seguridad Económica y Profesor de la Facultad de Derecho y Escuela de Posgrado en Derecho de la Universidad Nacional de Seúl. Obtuvo títulos de Licenciatura, Maestría y Doctorado en Derecho en la Facultad de Derecho de la Universidad Nacional de Seúl, y títulos de Doctor en Jurisprudencia (Juris Doctor) en la Facultad de Derecho de Boston College y Maestría en Derecho (LL.M.) en la Facultad de Derecho de Georgetown. Trabajó en el Ministerio de Asuntos Exteriores tras aprobar el 26º examen de servicio exterior. Ejerció como abogado en Willkie Farr & Gallagher LLP en Washington D.C. y anteriormente fue profesor en la Facultad de Derecho y Escuela de Posgrado en Derecho de la Universidad de Hanyang. Sus principales áreas de investigación son el derecho internacional (derecho internacional del comercio, derecho internacional de la inversión).

■ Autor: Son Yeol_Director del EAI. Profesor de la Escuela de Estudios Internacionales de la Universidad Yonsei. Obtuvo un doctorado en Ciencias Políticas en la Universidad de Chicago. Ha sido profesor en la Universidad de Chung-Ang y actualmente es profesor en la Escuela de Estudios Internacionales de la Universidad Yonsei y Director del Instituto de Estudios de Asia Oriental (EAI). Ha sido Decano de la Escuela de Estudios Internacionales de la Universidad Yonsei, Jefe del Departamento Underwood de Estudios Internacionales, Director del Instituto de Investigación para el Desarrollo Sostenible y Director del Instituto de Estudios Internacionales. También ha sido Profesor Visitante Especial en la Universidad de Tokio y Visiting Scholar en la Universidad de Carolina del Norte (Chapel Hill) y la Universidad de California (Berkeley). Fue Presidente de la Asociación Coreana de Política Internacional (2019) y Presidente de la Asociación de Estudios Japoneses Contemporáneos (2012). Ha sido becario senior de Fulbright, MacArthur, Japan Foundation y del Instituto de Investigación Avanzada de la Universidad de Waseda, y ha servido como asesor para el Ministerio de Asuntos Exteriores, el Instituto Nacional de Diplomacia, la Fundación de Historia de Asia Oriental y la Fundación Coreana para el Intercambio Internacional, y como miembro experto del Comité para la Era de Asia Nororiental. Sus áreas de especialización son la diplomacia japonesa, la economía política internacional, la política internacional de Asia Oriental y la diplomacia pública. Sus publicaciones recientes incluyen "Condiciones para el éxito presidencial en 2022" (coeditor, 2021), "Propuestas de política exterior para la nueva administración en 2022" (coeditor, 2021), "La historia del atractivo global de BTS" (coeditor, 2021), "Las opciones de Corea después de la crisis" (coeditor, 2021), "Japan and Asia's Contested Order" (coautor, T. J. Pempel, 2019), "Understanding Public Diplomacy in East Asia" (coautor, Jan Melissen, 2016), "South Korea under US-China Rivalry: the Dynamics of the Economic-Security Nexus in the Trade Policymaking," The Pacific Review 23, 6 (2019), "Diplomacia de país mediano de Corea" (coeditor, 2017).

■ Coordinación y Edición: Park Ji-soo, Asistente de Investigación del EAI

    Contacto: 02 2277 1683 (ext. 208) | jspark@eai.or.kr