Don’t ignore China’s opposition to ‘Chip 4’
The author is a professor of political science at Ajou University.
China strongly resists the so-called Chip 4 alliance envisioned by the United States to muster Asian chip makers of South Korea, Japan and Taiwan in the chip supply chain. The Chinese foreign and commerce ministries criticized the move as a plot to exclude China from the semiconductor value chain and thus goes against the free trade order. China’s Global Times warned that South Korea could face retaliation as it did in the wake of deploying the U.S.-led Thaad missile defense system in spite of Beijing’s strong protest.
South Korea heavily reliant on U.S. technology and equipment for chip production cannot ignore the U.S. invitation to a chip alliance despite Chinese opposition. Otherwise, Korean companies could face various barriers the U.S. levies on Chinese tech companies. Under the “guardrails provisions” in the $280-billion CHIPS and Science Act that passed the House of Representative last week, companies awarded with U.S. chip subsidies cannot engage in any “signification transaction” involving “material expansion of semiconductor manufacturing” in China or any other foreign country of concern — North Korea, Russia and Iran, for instance — for 10 years.
Given the historic lesson South Korea learned — the downfall of the Japanese chip industry after Tokyo’s chip agreement with Washington in the 1990s — Seoul has no choice but to comply with the U.S. proposal.
But South Korea is not in the position to outright ignore China’s warnings, given the heavy weight of the country in the supply chain and in exports and trade balance. About 60 percent of chip output from South Korea goes to China. Not all Korean chip supplies are used in China, as nearly half of them imported from South Korea are assembled into finished products in China for export. According to the U.S. Semiconductor Industry Association (SIA), America and China are nearly on par in final chip consumption. But after 2025, China is projected to exceed the U.S., which means greater reliance on the Chinese market for South Korea’s chip exports.
Korea’s trade surplus largely comes from China. Exports to China from 1993 to 2021 made up 22.5 percent of Korea’s total outbound shipments, and the country owed 86 percent of its trade surplus to China. Chips have been the biggest profit maker in its trade with China. If chip exports to China fall, so would the country’s trade surplus.
Korea incurred its first-ever deficit in trade with China in May and June this year. An entrenched trade deficit with China could bode badly for Korea’s sovereign rating at a time when the Kospi has lost more than 20 percent so far this year, the Korean won is at its weakest against the dollar in 13 years and Korea’s foreign exchange reserves have been falling since March.
South Korea’s chip manufacturing facilities in China and supply chains are another worry. The Xian complex of Samsung Electronics is responsible for 40 percent of NAND flash supplied by the world’s largest memory-chip maker globally, and the Wuxi complex of SK hynix accounts for nearly a half of global DRAM supplies.
Korea also relies on China for more than 40 percent of the discreet chip devices, memory chips, metals and diodes. China cannot restrict Korean companies for now since it is in need of chips. But the market is increasingly being dominated by consumers, not producers, as seen in the fall of stock prices of Korea’s major chipmakers by more than 20 percent this year due to deepening concerns about oversupply.
The impact of the chip alliance on semiconductor trade should also be examined. Despite U.S. punitive tariffs on Chinese imports and sanctions on tech exports in 2018, chip exports from Japan, Taiwan and America to China have increased. Despite military tensions, Taiwan’s chip exports to China hit a record high last year. That shows U.S. sanctions on China would have limited impact for a while.
South Korea also must prepare for possible consequences of a flop in the Chip 4 alliance. For the alliance to work, major chipmakers in Korea, the U.S., Japan and Taiwan must cooperate closely. Given the fierce competition in the field, however, Samsung Electronics, TSMC and Intel won’t likely give up their interests for cooperation. In September last year, when the U.S. Commerce Department asked major chipmakers to share some of confidential materials on customers, inventories and sales, they waited until the last minute and handed in documents without substance. On top of that, Intel, Samsung and TSMC, who run facilities in China, all have protested the guardrails provision restricting expansion in China.
Korea and America fundamentally differ in interests over semiconductor trade and supply chains. The U.S must bring foreign companies into the country to increase chip output at home, whereas Korea must export advanced chips to China and other countries. During negotiations for the alliance, the administration must persuade the U.S. not to hurt Korean interests.
Translation by the Korea JoongAng Daily staff.