Anticipating a U.S.-South Korea Semiconductor Alliance
During a recent summit trip to South Korea, President Joe Biden made his first stop at a Samsung Electronics plant and toured the semiconductor manufacturing facility that would serve as the model for a $17 billion factory in Texas scheduled to begin operations in 2024. Biden and the newly inaugurated South Korean President Yoon Suk-yeol, in a joint statement, also outlined several areas of bilateral cooperation for addressing supply chain vulnerabilities in critical technologies. The U.S.-South Korea technological alliance could be the means to strengthen and upgrade the security alliance.
Semiconductors are at the heart of bilateral technology cooperation as policymakers in both Washington and Seoul are intently focused on this sector. President Biden named semiconductors as one of the four critical products to U.S. security and called for “friend-shoring” where production of those goods are brought back to the United States and its like-minded allies. Both the United States Innovation and Competition Act and the America COMPETES Act — the Senate and House versions of the bipartisan China competition bill slowly making its way through Congress — include $52 billion for domestic semiconductor research, design, and manufacturing.
Similarly, South Korea renewed its interest in supporting the advanced semiconductor industry in recent years. Former President Moon Jae-in worked to form a “semiconductor belt” spanning across the Gyeonggi and Chungcheong provinces with resilient supply chains. The South Korean National Assembly passed the National Advanced Strategic Industry Act during the Moon administration, empowering the Minister of Trade, Industry, and Energy to regulate the export of advanced semiconductors to foreign companies. President Yoon also declared his intentions to make South Korea a “semiconductor superpower” and vowed to train more semiconductor specialists by expanding the quota for engineering students at universities.
Semiconductor cooperation between the United States and South Korea will better situate both countries from China-related semiconductor supply chain disruptions that are likely to emerge in the coming decades. A potential Chinese invasion of Taiwan can trigger massive semiconductor shortages, given that the island is home to the world’s largest foundry operated by the Taiwan Semiconductor Manufacturing Company. At the same time, China’s semiconductor industry continues to grow with generous state subsidies and aggressive production of less advanced chips that flood the market with cheaper semiconductors, creating unfair competition and market disruptions. Chinese domestic capacity to produce cutting edge chips moreover will give China the ability to more readily develop advanced weapons systems and malign surveillance tools.
The United States is pushing to formalize semiconductor cooperation with South Korea through the “Chip 4” alliance framework, which also includes Japan and Taiwan. The Yoon administration reportedly faces significant pressure from the United States and will make a final decision by end of August. While details about the new quadrilateral framework are scant, full realization of technological alliance between the two security allies will likely involve wholly detaching China from the global semiconductor manufacturing process and a significant reduction of semiconductor sales to China. It can also include technology sharing between American and South Korean chipmakers. While certain aspects of this vision may be attainable in the future, several issues will likely frustrate expectations of a technological alliance.
Points of Tension
Despite talks of cooperation, U.S. and South Korean companies — and by extent, the two economies — fundamentally are technological competitors. The semiconductor industry is highly competitive, with each firm focused on acquiring certain cutting-edge capabilities before others and, consequentially, increasing their market share. Top firms of a particular product dominate that category and reap the profits given the business costs associated with switching suppliers, reinforcing the winner-takes-all nature of the semiconductor industry. Intel and Samsung, for example, are both constructing new semiconductor fabrication plants in the United States and will compete on contract-manufacturing chips.
The two countries hold a level of distrust toward each other’s industrial policies that support the semiconductor industry. The United States has been wary of state subsidies received by South Korean firms for warping competition and lacking transparency. South Korea initially feared that only U.S. firms stood to receive subsidies in the CHIPS for America Act. The U.S. Department of Commerce’s request to chipmakers, including South Korean firms, to provide supply chain information to help the Biden administration address the global chip shortage was also met with considerable misgivings from both the South Korean government and businesses.
Further, South Korean chip manufacturers have significant business interests in China, and U.S. policies on supply chains will hurt their bottom line. Samsung and SK Hynix both operate plants in Xian and Wuxi, respectively, and the Chinese market accounts for over 40 percent of South Korean chipmakers’ sales. In 2021, the United States blockedSK Hynix from upgrading its Wuxi plant with ASML’s latest extreme ultraviolet (EUV) lithography machine, fearing that introducing the most advanced lithography equipment to China risked the technology being stolen and used for Chinese military modernization efforts. SK Hynix now is concerned with profitability and plant viability issues due to its inability to upgrade the plants. South Korean chipmakers are also reportedly wary that joining the Chip 4 alliance would hurt their operations in China due to both U.S.-imposed restrictions and Chinese retaliation.
As evinced by Samsung’s planned investments in Texas, the South Korean private sector does not wholly oppose U.S.-led semiconductor supply chain restructuring despite some grumblings about recent Biden administration policies. However, the transition will nevertheless be painful and highly risky for firms that have derived much of their profits from doing business in China.
The South Korean government, too, understands the strategic rationale for moving supply chains away from China. South Korea vividly realized the national security risks of overreliance on Chinese supply chains through the diesel exhaust fluid (DEF) shortages starting in October 2021. The DEF shock, which disrupted agriculture and shipping industries, elevated broader concerns about economic reliance on China: a widely circulated report by the Korea International Trade Association revealed that China accounted for 1,850 out of 3,491 items for which South Korea relied on a single country for 80 percent or more of imports.
The Yoon administration has signaled that the “America for Security, China for Economy” strategic model needs to be replaced with a “America for Security, World for Economy” model. However, the administration’s political willingness and ability to do so remain to be tested. South Korea is a middle power hedger between the United States and China. Technological cooperation, which ultimately is a balancing act against China, closely fuses economic and security issues and presents difficult questions for South Korea’s strategic outlook. China has already criticized Chips 4 as “coercive diplomacy” and warned that South Korea would “cause more harm than good" by taking part. If South Korea were to completely limit its cutting-edge chips from China, South Korea may also open itself up to economic retaliation from China.
The alignment of U.S. and South Korean interests in cutting-edge technology, demonstrated through the Biden-Yoon summit, makes cooperation on semiconductors a political priority. A full-fledged technological alliance may very well emerge in the future given strong U.S.-South Korea relations, shared concern about Chinese supply chains, and dominance of U.S. technology undergirding South Korean semiconductor production. Important first steps taken by both governments to improve communication and foster trust can open the path toward a more robust partnership that better prepares both economies for China-related disruptions.
Interdependence between the allies should be increased, and friend-shoring should go both ways. Semiconductor policies pursued by either government should be grounded on principles of reciprocal investments and equitable subsidy availability to build trust. The United States should also proactively work to reduce friction emanating from export control measures through high transparency and communication.
South Korean firms, whose main customers are in China, will also lose huge markets as a result of not only U.S. policy but also the growth of SMIC and other Chinese semiconductor firms. While planned investments in new foundries can help address medium-term semiconductor shortage risks, it can open up over-supply issues if the market demand does not meet the increased supply. The United States and South Korea need to work to find another region to augment and replace the Chinese market.
Chris Park is the summer 2022 intern for Korea studies at the Council on Foreign Relations.