S. Korea’s tech, industry shift toward US likely to foster China-based risks

Posted on : 2022-05-23 16:48 KST Modified on : 2022-05-23 16:48 KST
Some China experts say that South Korea has “nothing to gain in the long term” from China being shut out of supply chains
President Yoon Suk-yeol gives a speech after a tour of Samsung Electronics’ semiconductor plant in Pyeongtaek on May 20, with US President Joe Biden. (Yonhap News)
President Yoon Suk-yeol gives a speech after a tour of Samsung Electronics’ semiconductor plant in Pyeongtaek on May 20, with US President Joe Biden. (Yonhap News)

The biggest item on the agenda at the latest South Korea-US summit was economic security.

The two leaders declared their plans to beef up their technology alliance in areas such as semiconductors and electric vehicles in order to reshape related supply chains under US leadership.

The joint declaration that came out of the summit could be seen as showing an alignment of interests between the US, which is seeking to rein in China’s rise in technology fields, and South Korea, which wants to hold down its competitive advantage over China.

Many are hoping and predicting that stronger cooperation with the US in areas of future and advanced technology will reap positive results for the South Korean economy.

“When it comes to advanced and future industries, the US has an overwhelming technological advantage and market, while South Korea has enormous manufacturing capabilities,” explained an official with the Korea Chamber of Commerce and Industry.

“China’s pursuit is a life-or-death concern not just for the US but for us too, and it will necessitate a proactive joint response,” they added.

Semiconductor industry analysts said the semiconductor technology gap between South Korea and China grew by around three years thanks to US controls on exports to China dating back to the Trump administration.

With South Korea taking part as a founding member of the new US-led trade order — the Indo-Pacific Economic Framework (IPEF) — its focus is rapidly shifting toward the US not just in terms of foreign affairs and national security, but also in the area of trade and industry.

Officially, both have insisted that the IPEF is not intended as a means of crowding out China.

But they’ve also stated that the focus of economic security is on “authoritarian” orders that “do not share our values,” while characterizing members as countries that “support liberty and democracy.” In effect, they are reshaping the trade order to center on friends and allies, while excluding China.

Indeed, major areas on the agenda for cooperation in the IPEF include fair trade, supply chain flexibility, carbon neutrality, and combating corruption. This means it directly targets actions by the Chinese government, including subsidies to the private sector, unfair transaction practices, and market distortions.

“From China’s standpoint, they’re worried that technical barriers to trade that are disadvantageous to them will become the new trade norms,” explained a researcher at one South Korean state-run think tank who asked not to be identified.

“It is to our advantage in several ways for us to get on board with the US-led supply chains, but officially taking part in a cartel to shut China out is an entirely different issue,” they said. “There’s nothing beneficial about geopolitical risks becoming an endogenous variable rather than an external variable in the South Korean economy.”

Analysts are predicting South Korea’s implicit approach to trade — depending on China economically and on the US in security terms — could be in for a severe shakeup. This means China is very likely to become a larger risk to South Korea as an export power that has become more and more reliant on China under the global division of labor.

China currently accounts for around 25% of South Korea’s trade. Those proportions are even larger in advanced industry areas such as semiconductors, smartphones, and displays. As of April, China represented 42% of exports and 37% of imports in the information and communications technology (ICT) sector.

In the case of semiconductors, China accounts for over 50% of exports and imports. The basic structure in advanced industries is one in which raw materials and intermediate goods are imported from China and used to make finished products.

For this reason, China experts are predicting that South Korea has “nothing to gain in the long term” from China being shut out of supply chains. While it may be able to widen its lead over China in key technology areas, the decision to seek out replacements for the manufacturing of high-tech items is not economical.

SK Hynix memory semiconductor factories in China are already running into problems. The company has been implementing process improvement efforts with additional investments since last year, but US export controls have left it unable to bring in the extreme ultraviolet (EUV) equipment it needs for its ultrafine process.

“If we can’t improve our process in a timely manner, we’re going to end up losing out in the competition with other memory companies,” explained a semiconductor industry source.

Analysts also advised South Korea to consider its long-term interests carefully with regard to domestic companies investing actively in the US.

The US, which views the production of 70%–75% of the world’s semiconductors in East Asia (South Korea, Taiwan, and Japan) as being a geopolitical security risk in the intermediate to long term, currently plans to increase the proportion of US-made semiconductors to 60% of global production within the next 10 years. It is now working hard to establish production bases domestically not just through Samsung Electronics but also through Intel, Taiwan’s TSMC, and other companies.

For that reason, many are predicting major volume competition and a potential supply glut beginning around 2025, when the semiconductor factories in question start operating full-scale.

“There’s no guarantee that chipset client companies in the US are going to be a stable source of orders in the intermediate to long term,” said the head of one semiconductor component company.

“We could see a situation where the relative role of domestic production bases diminishes and we end up losing our status as a semiconductor power,” they warned.

“We need to consider the timeline and scale of overseas investment based on our own strategy.”

By Kim Hoe-seung, senior staff writer

Please direct questions or comments to [english@hani.co.kr]

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