With the final rule regarding the CHIPS Act guardrails released on September 22, Korean chipmakers’ ability to receive U.S. subsidies while maintaining operations in China appears to be on firmer footing. Korean chipmakers had been caught in a form of limbo ever since the U.S. Department of Commerce released the proposed guardrails in March 2023, which among other things originally placed a limit of $100,000 on expanding chipmaking in “foreign countries of concern” and set an expansion threshold as a percentage of monthly wafer input.
With the guardrails now finalized, the $100,000 limit for expanding semiconductor manufacturing has been removed completely and protocols for measuring semiconductor manufacturing capacity have been modified to consider wafers per year as opposed to wafer starts per month. The final rule is a boon to Korean companies such as Samsung and SK Hynix who simultaneously are investing in multibillion dollar chip facilities in the United States while maintaining significant production sites in China.
The rule was modified in response to a number of public comments which argued that the $100,000 threshold for expanding capacity in foreign countries of concern was too low “given the high capital costs associated with semiconductor manufacturing.” The Department of Commerce adjusted its rule to acknowledge that different applicants for the CHIPS subsidies may have different appropriate thresholds for what constitutes a “significant transaction.” Similarly, the measurement of manufacturing capacity in foreign countries of concern was adjusted to an annual basis to “avoid undue focus on a single month where capacity may be higher or lower.”
The allowance the rule makes for production expansion in China is critical for Korean firms, many of which have core business operations in China. Samsung and SK Hynix, who together globally control 70 percent of DRAM and 50 percent of NAND memory markets, maintain production facilities in Xi’an, Wuxi, and Dalian in China. Where the initial rule would have fundamentally forced Korean companies to choose between continuing operations in the United States or China, the modified rule now allows for more discretion for firms to maintain their existing global supply chains.
Despite the stability the updated guardrails provide for Korean companies to continue their operations in China, Samsung and SK Hynix may still have to grapple with the uncertainty surrounding their ability to export American semiconductor technology to their plants there. After the United States implemented licensing requirements for outbound advanced chip technology to China on October 7, 2022, Samsung and SK Hynix received one year waivers from the Commerce Department to continue to supply to their Chinese production sites.
With the deadline for its expiration approaching, the next update on Korea’s licensing requirements will be pivotal as to how they continue their China operations. In June, undersecretary of Commerce for Industry and Security Alan Estevez stated at an industry event that the Department of Commerce “intended” to extend the waivers for another year, a statement that was mirrored in August reporting by Nikkei citing “industry sources.” With the initial waivers set to expire next month, there has still not been an official U.S. government announcement about renewing the waivers for an additional year. Nonetheless, on Friday, U.S. Deputy Secretary of Commerce Don Graves met with Minister Moon-kyu Bang of the Ministry of Trade, Industry, and Energy (MOTIE) where it was reported that Minister Bang pursued “active cooperation” with Commerce to produce certainty on the export restriction waiver expirations. The non-renewal of the waivers would accelerate the polarization of global supply chains and potentially push Korea closer into a position of supply chain decoupling.
While the modification of the Commerce Department’s China expansion rules for CHIPS Act subsidies helps Korean companies avoid having to completely upend their global supply chains to receive the funding, an additional update to Korea’s waivers from the export controls would provide a greater degree of certainty. Banning companies who invest in China’s chip sectors from accessing certain U.S. technologies outright would cause supply chain disruptions contrary to the supply chain resilience sought in many of the U.S.-Korea and regional dialogues.
Deeper restrictions could force Korean companies to have to make a choice between the United States and China in either continuing to invest in America or protecting their supply chains in China. Already, Korean firms exercise restraint in not replacing banned American companies in China. China is banning U.S. firms like Micron from key infrastructure projects and is restricting the Chinese export of minerals critical for semiconductor manufacturing like gallium and germanium. Korea is accordingly caught in the collision of great-power rivalry. At its very least, the latest CHIPS Act guardrails provide a temporary respite from this, offering a balanced path forward in navigating the complex landscape of U.S.-China relations while avoiding technological dirigisme.
Tom Ramage is an Economic Policy Analyst at the Korea Economic Institute of America. The views expressed here are the author’s alone.
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