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The Peninsula

CHIPS Act: Outlook and Implications for South Korea

Published August 24, 2022
Category: South Korea

On August 9th, President Biden signed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act to boost U.S. investment in the semiconductor industry and incentivize domestic manufacturers. Some of its major provisions incentivize investment in the United States by major foreign chip manufacturers, namely those from Taiwan and South Korea. Framed as a major legislative initiative to buttress U.S. technical prowess amid accelerating U.S.-China competition, the CHIPS Act and the future of U.S.-ROK technological cooperation pose both challenges and opportunities for South Korea and its advanced semiconductor industry.

Over the last three decades, U.S. semiconductor production has declined. The U.S. share of global semiconductor production used to be 37 percent. Today, it is just over 12 percent. In contrast, over the last five years China’s share of global production has grown from 3.8 to 9 percent. The global chip shortage during the pandemic and U.S.-China trade war have also highlighted the necessity of a strong domestic manufacturing base for semiconductors.

The legislation appropriates $52.7 billion in subsidies and tax credits to incentivize research and manufacturing in the United States. Furthermore, the legislation will invest about $280 billion over the next decade in various organizations and offices for R&D.  Firms hoping to capitalize on this major legislative initiative expressed interest well before President Biden’s signing of the bill, with Ford Motor, General Motors, and GlobalFoundries meeting with U.S. government officials to discuss their plans for semiconductor investment.

If the CHIPS Act is a sign of renewed U.S. resolve in advancing its technological edge amid strategic competition with China, it presents a new set of questions for South Korea’s government and industry. South Korean firms such as Samsung and SK Hynix are some of the most prolific semiconductor manufacturers of the world. As such, Samsung was one of the “Big Three” chip manufacturers approached by the U.S. government in the years leading up to the CHIPS Act. Indeed, President Biden’s first public meeting with South Korea’s President Yoon Suk-yeol in May 2022 was at a Samsung semiconductor plant. The joint presidential visit symbolically underscored the importance of the semiconductor industry for both countries, and the Biden administration’s own sense of priority for this critical industry.

The legislation’s incentives for foreign investors could certainly make the United States more attractive as a destination for new semiconductor foundries (fabs). Samsung is expected to reap some benefits with an investment in a new plant in Taylor, Texas. But, a particular challenge for South Korean firms are their current fabs in China. Of the seven total fabs run by Samsung, two are in China. The existing plants are no small matter: Samsung produces 40 percent of its NAND chips at its Xi’An plant. Not only could it take a herculean effort for Samsung to build such a capacity in the United States even with the CHIPS Act incentives, which are capped at $3 billion per program, but the legislation would prohibit Samsung from expanding its semiconductor manufacturing capabilities in China for 10 years. Therefore, how Samsung will manage its operations in China in the face of the benefits and regulations posed by the CHIPS Act remains to be seen.

But the U.S. drive toward securing semiconductor supply chains and bringing technical infrastructure to the United States has much further implications not only for South Korea’s chip manufacturers, but also for its government. The Biden administration has been pushing for South Korean membership in a prospective “Chip 4” alliance with Taiwan and Japan. As Seoul has  traditionally been reluctant to antagonize Beijing, as South Korea faces considerable pressure from China when considering its investments and alignments with the United States in the semiconductor field. Shortly before President Biden signed the CHIPS Act, South Korea’s Foreign Minister Park Jin met with his Chinese counterpart Wang Yi in Qingdao in the first meeting of its kind since President Yoon took office. The topic: South Korea’s place amid Sino-U.S. competition, particularly with regards to semiconductors. Contrary to ostensible U.S. intentions with the CHIPS Act and related measures like Chip 4, Foreign Minister Park reassured Wang that South Korean meetings with the United States on semiconductor supply chains are “not meant to exclude or target any specific country.” U.S. commitment to its domestic chip production could strengthen the global supply chain for its allies, assuaging South Korean concerns of retaliatory Chinese economic pressure. However, South Korea’s ambiguous stance in Qingdao seems to indicate that Seoul may not yet be convinced.

The goals of the CHIPS Act, along with its passage through both houses of Congress, signal a significant, whole-of-government and industry initiative to build out U.S. technical competitiveness. When coupled with diplomatic overtures like Chip 4, the measure is also the latest shot across the bow in the accelerating U.S.-China competition. Ultimately, the CHIPS Act not only presents South Korea and its advanced semiconductor industry with new opportunities for cooperation with the United States, but also adds to enduring questions for Seoul’s place between Washington and Beijing as advanced industrial states vie for preeminence in this critical industry.

Jae Chang is an Intern with the Korea Economic Institute of America. Andy Hong is a Program Officer. The views expressed here are the authors’ alone.

Image from Shutterstock.

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