Heightened Tech Regulation Ahead of US-China Summit: Resurgence of Semiconductor and AI Hegemony Conflict and Korea's Response

Executive Summary

Ahead of the summit between Trump and Xi scheduled for next month, the US is accumulating unilateral technological regulations against China, exemplified by the FCC's review of optical transceiver bans, reigniting the semiconductor and AI hegemony competition. The conflict's ignition point is not the White House's diplomatic track but the bureaucratic track of regulatory agencies, suggesting the likelihood of localized friction regardless of the summit's success. Beijing has largely refrained from direct retaliation thus far, but this patience is being tested, and retaliation could be triggered if specific regulatory items cross a critical threshold. With the White House's report on transshipment risk countries specifically naming Korea's semiconductor belt and coupled with US pressure for AI alignment, Korea has emerged as a direct stakeholder, not a passive observer. Therefore, the government should proactively establish a scenario-agnostic response system, focusing on improving origin verification infrastructure and building channels for industry-wide coordinated responses, rather than pre-emptively judging the summit's outcome.

I. Issue Situation Analysis

Heightened Tech Regulation Ahead of US-China Summit: Resurgence of Semiconductor and AI Hegemony Conflict

1. Background and Progression of the Issue

Ahead of the Trump-Xi summit expected to be held in Washington next month, the US Federal Communications Commission (FCC) has opened a new technological front against China [1]. Although the FCC is a regulatory body with a low-profile mandate, it has accumulated a series of measures against China over the past several months [1]. Notably, Beijing has refrained from direct retaliatory responses to these measures [1]. The SCMP assesses that these FCC actions are testing Beijing's restraint [1].

The expansion of the technological front appears to be shifting from a semiconductor-centric focus to encompassing AI hardware broadly. The FCC is reportedly considering a ban on optical transceivers [4]. Optical transceivers are small components that transmit and receive data as optical signals using fiber optic technology, playing a crucial role in high-speed data transmission for AI data centers and cloud networks [4]. The SCMP diagnoses this as the US-China tech war delving into the smallest links of the AI hardware chain, beyond semiconductor chips [4].

Pressure is also being applied on the trade front. On August 13, the White House Office of Trade and Manufacturing Policy (OTMP) released a 25-page report titled 'The Great Transshipment Scam' [10][16]. The report claims that the practice of Chinese products being exported to the US after undergoing only simple assembly, packaging, and relabeling in third countries to launder their origin is widespread [10]. The report categorizes the target countries into three types based on their economic size and integration into Chinese supply chains, listing over 40 countries including Korea, Japan, Taiwan, the EU, as well as Mexico, Canada, India, Vietnam, and Singapore [9][10]. Notably, Korea's semiconductor belt in the Gyeonggi province was specifically mentioned [10][16].

2. Current Situation

In an interview with the American media Punchbowl News, President Trump stated, "I don't want to see China win in artificial intelligence (AI)" [7]. He added, "When President Xi Jinping comes in a few weeks, I will talk to him (about AI)," confirming his intention to directly raise the AI agenda at the summit [7].

The US is also concurrently pressuring its allies to choose sides. According to an internal draft obtained by Reuters, the US is preparing to demand that dozens of countries choose sides in the AI competition [14]. The warning states that countries joining Beijing's competitive framework simultaneously will be excluded from the US-led AI coalition under the Pax Silica initiative, planned to launch in 2025 [14].

Conflict has also surfaced in the drone sector. The US has imposed tariffs ranging from 25% to 100% on imported drones, citing Section 232 of the Trade Expansion Act [13]. The SCMP reports analysts' assessments that this measure will result in a 'lose-lose' outcome for both the US and China, and diagnoses drone technology as emerging as a central stage for the technological and trade competition between the two countries [11].

Coordination of the summit agenda does not appear to be smooth. The SCMP reported that the US-China Board of Investment, one of the key outcomes of the summit held in May, is unlikely to be included in the list of outcomes for the summit next month [17]. This suggests that practical follow-up measures have been stagnant since the May agreement [17].

Market reactions are somewhat mixed. Citi analysts assess that the latest US regulations are unlikely to cause an immediate large-scale blow to China's AI exports [15]. However, they point out that measures such as restricting access to open-weight models are 'real variables' that could change the global AI landscape [15]. The competitiveness of Chinese AI models is also being highlighted. Chinese models account for four of the top 10 global AI models, and their development costs are estimated to be one-tenth of those of US models [7].

3. Key Actors and Positions

US FCCexhibits a dual approach, seeking to expand the front of unilateral regulations against China while attempting not to undermine the summit [1]. Measures are being accumulated at the regulatory agency level, separate from high-level negotiations at the White House [1].

White House Office of Trade and Manufacturing Policy (OTMP)is increasing pressure on its allies by designating them as transshipment risk countries [10]. This aims to establish a continuous monitoring system based on structural exposure rather than the detection of individual violations, extending the Trump administration's second term's emphasis on linking security and economy and demanding burden-sharing from allies [10].

President Trump on a personal level, is publicly expressing his intent to curb China by directly mentioning the AI hegemony issue as a core agenda item for the summit [7]. Simultaneously, PIIE analysis points out that Trump's unpredictable approach to tariff policy makes it difficult for businesses and consumers to gauge the next steps [6]. There are also observations that the simultaneous agreement to lower tariffs on some 'nonsensitive' items and the imposition of new tariffs could paradoxically lead companies to return to China [6].

Chinese Governmenthas maintained a policy of restraint, refraining from direct retaliation against the FCC's series of measures thus far [1]. This is interpreted as Beijing's strategic calculation to avoid disrupting the negotiation landscape ahead of the summit [1]. However, regarding individual measures like drone tariffs, concerns are being raised about potential disruptions to Chinese companies' global expansion strategies [11].

Over 40 countries designated as bypass export risk countries, including Koreaare structurally exposed between the US and China. The specific mention of Korea's semiconductor belt in the Gyeonggi province foreshadows potential practical friction in future origin verification processes [10]. Countries such as Japan, Taiwan, the EU, Vietnam, Singapore, India, Mexico, and Canada are also on the same list, forming a broad group of countries being pressured to choose sides [9][14].

4. Key Issues

The first issue is the consistency between actions taken by regulatory agencies and summit-level diplomacy. As measures by individual departments like the FCC proceed independently of the White House's efforts to manage the summit, there is a persistent risk that the negotiation framework itself could be undermined [1].

The second issue is the expanding scope of technological regulation. The conflict, initially focused on semiconductors, has spread to optical transceivers, open-weight AI models, and drones, indicating a continuous broadening of regulated items [4][15][11].

The third issue concerns the position of allied nations. The dual pressure structure, where the US demands alignment while simultaneously designating allies as bypass export risk countries, imposes both political and trade burdens on middle powers, including Korea [10][14].

The fourth issue is the substantive outcome of the summit. The potential removal of the US-China Board of Investment, a symbol of the May agreement, from the agenda for the upcoming summit highlights the gap between high-level agreements and practical implementation [17].

II. In-depth Issue Analysis

Heightened Tech Regulation Ahead of US-China Summit: Resurgence of Semiconductor and AI Hegemony Conflict

In-depth Issue Analysis

1. Root Cause: Autonomous Dynamics at the Regulatory Agency Level

The current situation did not originate from a high-level negotiation between leaders or a top-down decision from the White House. It is the result of a regulatory agency, the FCC, with a relatively low political profile, accumulating unilateral measures against China [1]. The SCMP assesses that the FCC has opened a new technological front "while attempting not to undermine the high-stakes summit" [1]. This indicates that US technological regulation against China is proceeding according to the internal logic of bureaucratic organizations, independent of the White House's summit diplomacy schedule.

This structure carries the potential for conflict with President Trump's negotiation style. President Trump has expressed his intention to directly raise the AI agenda with President Xi ahead of the summit [7]. However, the FCC, a working-level agency, is considering measures such as an optical transceiver ban independently of the summit schedule [4]. This structure allows for potential discrepancies and rifts between political coordination at the leader level and technical enforcement by regulatory agencies.

Beijing's response strategy is also a key component of the root cause. China has refrained from direct retaliation against the FCC's cumulative measures over the past several months [1]. This restraint is interpreted as a strategic decision to maintain the fragile trade truce established by the May summit agreement. The issue is that this restraint is not unlimited. The SCMP diagnoses that these actions are "testing Beijing's patience" [1]. The critical variable in this situation is when China's patience will reach its limit.

2. Structural Context

Economic Structure: Weaponization of Interdependence and Its Paradox

The US-China tech conflict originated from the asymmetrical interdependence of trade imbalances and has gradually evolved into a new form of economic warfare that leverages the network structure of the global economy [12]. Professor Lee Seung-joo of EAI points out that "there is a paradox in the weaponization of interdependence" [12]. This means that trade wars utilizing asymmetry can negatively impact one's own economy due to the networked structure of the global economy [12]. The designation of countries as transshipment risk countries, which includes many US allies and partners such as Korea, Japan, the EU, India, and Vietnam [9][10], illustrates the manifestation of this paradox. The pressure on China is impacting the supply chains of allied nations.

PIIE points out that the Trump administration's tariff policy creates a situation where companies find it difficult to anticipate the next steps due to its unpredictability [6]. In particular, the simultaneous imposition of new tariffs on 16 trading partners and the agreement to lower tariffs on 'nonsensitive' Chinese goods could paradoxically lead companies to return to China [6]. This suggests that the two policy objectives—pressure on China and blocking bypass exports—may conflict with each other.

Industrial Structure: Expansion from Semiconductors to Overall AI Hardware

Semiconductors are key components for realizing the Fourth Industrial Revolution, including 5G, cloud computing, the Internet of Things, autonomous vehicles, and artificial intelligence. They are also dual-use technologies that determine the performance of various advanced weapons [5]. This dual-use nature has been the structural background that elevates the US-China tech conflict from a mere industrial policy competition to a security issue. Professor Bae Young-ja of EAI points out that both the US and China must acknowledge that they have developed the global value chain together over decades of interdependence [5].

The FCC's review of optical transceiver regulations is an example of how this structure is expanding. Optical transceivers are not advanced semiconductor chips but components responsible for data transmission in AI data centers [4]. The SCMP describes this as "the smallest link in the AI hardware chain," assessing that the US-China tech war is penetrating the detailed components of the supply chain, beyond final products or core chips [4]. This pattern, where regulated items continuously expand from advanced semiconductors to components and materials, is likely to be repeated in the future.

Security Structure: Alignment Pressure and the Dilemma of Third Countries

The US is moving beyond individual company sanctions to demanding alignment from its allies and partner countries as a whole. According to internal documents obtained by Reuters, the US plans to exclude countries that simultaneously join Beijing's competitive framework from the US-led AI coalition through the Pax Silica initiative, set to launch in 2025 [14]. This is a strategy to isolate China from the resources necessary for AI competition [14].

As Professor Kim Sang-bae of EAI points out, if this technological competition, combined with tariff pressure, restrictions on corporate transactions, and foreign investment regulations, continues, it could lead to the bifurcation of global supply chains [8]. Countries like Korea, which are closely linked economically with both the US and China, are likely to face pressure to make a choice in this bifurcation phase [8]. The specific mention of the semiconductor belt in Gyeonggi province in the designation of transshipment risk countries [16] and the demand for alignment regarding participation in the AI coalition [14] demonstrate that this structural dilemma is not an abstract scenario but a current issue.

3. Historical Precedents and Comparison with Similar Cases

The current situation largely overlaps with the pattern of the Biden-Xi summit held during the APEC summit in November 2023. At that time, the two countries "applied the brakes to the US-China relationship, which was falling without wings, and cautiously explored the possibility of shifting to a management mode" [2]. The outcomes included institutionalizing military dialogues, blocking the distribution of fentanyl precursors, and prohibiting the use of AI in nuclear weapons control [2]. Although the summit agreement temporarily resolved the conflict, the structural limitation that "it is difficult to escape competition and conflict where advanced technologies and industries are intertwined" remained unresolved [2]. The pattern of regulations at the working-level agency level continuing and eroding the effectiveness of the agreements, even after the summit agreement, is being repeated in the current FCC case.

The 'US-China Board of Investment,' agreed upon at the Trump-Xi summit in May, shows a similar trajectory. It was one of the key outcomes of the May agreement, but the SCMP predicts it is unlikely to be included in the outcomes of the summit scheduled for next month [17]. The pattern of follow-up implementation being delayed or failing after high-level agreements are announced by leaders is accumulating as a precedent, demonstrating the fragility of the overall trade truce.

Compared to the trade war phase of 2018-2019, structural similarities are evident, along with an expansion. After the breakdown of negotiations in May 2019, the US-China trade war "lasted longer than expected," and the first Trump administration expanded its front from an initial approach using trade imbalances to a "new form of economic warfare through the networking of the global economy" [12]. The current phase is an extension of this expansion. However, the scope has significantly broadened, with regulated items diversifying from tariff items to semiconductors, 5G, AI, drones, and optical components [8][11][4], and the targets of pressure expanding from Chinese companies to over 40 allied countries [9][10].

4. Key Variables Shaping the Issue's Development

The first variable is whether Beijing's restraint will be maintained. China has not directly retaliated against the FCC's cumulative measures thus far [1]. If this restraint is breached by additional measures, such as an optical transceiver ban, it could directly impact the summit's success or agenda setting.

The second variable is the coordination between bureaucratic organizations and summit diplomacy. If the FCC's independent actions continue to conflict with the White House's approach to preparing for the summit, there may be an incentive for President Trump to directly intervene and coordinate the pace of regulation. Conversely, if left unaddressed, tensions could escalate right up to the summit.

The third variable is the restriction of access to open-weight AI models. While Citi analysts assess the current US-China trade friction to be manageable, they warn that measures like restricting access to open-weight models have the potential to reshape the global AI landscape as a "true wildcard" [15]. Unlike semiconductor export controls, these are identified as variables with unpredictable ripple effects.

The fourth variable is the attitude of third countries. The effectiveness of the US's strategy to encircle China will depend on how countries like Korea, Japan, the EU, and India respond to the US's pressure for alignment [14] and its designation of transshipment risk countries [9][10]. If allied nations fail to find a balance between the burden of verification and trade interests, the US's pressure strategy itself may encounter friction during the implementation phase.