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The Peninsula

South Korean Concerns with U.S. Semiconductor Policies

Published April 11, 2023
Category: South Korea

Semiconductors have become a focal point of increasing geopolitical competition between the United States and China. As a foundational technology to advanced military technologies and emerging technologies such as artificial intelligence, China has sought to become self-reliant for the production of semiconductors, while the United States has sought to block China’s advancements and return parts of the semiconductor supply chain to the United States. As one of the key players in the semiconductor industry, this trend has been raising concerns for both the South Korean government and companies.

According to the Atlantic Council, the United States is “losing ground” in the area of semiconductor manufacturing capacity and technology, while China has rapidly grown in this technological area. By 2020, China surpassed the semiconductor production capacity of the United States by 3%. In order to counteract this trend, the United States has increasingly used export controls to restrict Chinese access to critical semiconductor technology and passed the CHIPS and Science Act to incentivize investments in the U.S. semiconductor supply chain. National Security Advisor Jake Sullivan has described these steps as part of effort by United States government to “maintain ‘relative’ advantages over competitors in certain key technologies.”.

The CHIPS Act provides $52.7 billion in federal funding for manufacturing, research and development, and worker training, along with a 25% investment tax credit for capital expenses in manufacturing of semiconductors and related equipment. These subsidies and tax credits are meant to generate the “relative” advantage for U.S. semiconductor productions and to generate “historic investments that will poise U.S. workers, communities, and businesses to win the race for the 21st century”. The level of U.S. support for the semiconductor industry has created concern in South Korea that it may be lagging behind its competitors, including United States, in the section of semiconductor manufacturing because of the subsidies and tax credit.

Specific announcements related to CHIPS Act and its conditions have also raised concerns. The Notice of Funding Opportunity for subsidies under CHIPS Act stated three major conditions for receiving subsidies from United States government:

  • Subsidy applicants must agree not to engage in certain significant transactions involving expanding semiconductor manufacturing capacity in countries of concern for 10 years beginning on the date of the award.
  • Recipients who receive more than $150 million in direct funding will be required to share with the U.S. government a portion of any cash flows or returns that exceed the applicant’s projections by an agreed-upon threshold.
  • Applicants are prohibited from using CHIPS funds for dividends or stock buybacks.

The condition that concerns South Korean companies the most deals with their ability to expand in countries of concern, which includes China. Both Samsung and SK Hynix have NAND and DRAM manufacturing plants in China which account for more than 40% of their production. This restriction has raised concerns about the ability of South Korean companies to continue operating their factories in China.

Some of these concerns may have been relieved due to the recent details on the guardrails for the CHIPS Act announced on March 21st. The Commerce Department has announced that firms will be able to engage in a “material expansion” that would expand a facility’s production capacity by 5%, helping Korean firms “avoid the worst case”. However, the CHIPS Act still directly imposes constraints on South Korean companies manufacturing semiconductors in China, leading to continuing concerns in South Korea.

The export controls that U.S. government has enacted on semiconductors against China are also concerns for South Korea. The most significant of which is the “Implementation of Additional Export Controls: Certain Advanced Computing and Semiconductor Manufacturing Items; Supercomputer and Semiconductor End Use; Entity List Modifications.” The enactment aims to “cut China off from certain semiconductor chips made with U.S. equipment.” Moreover, the enactment requires “U.S. companies to obtain licenses to ship to China their equipment that can be used to produce advanced chips,” and this is also applicable to South Korean companies that have semiconductor manufacturing plants residing in China. Moreover, according to the announcement on March 21st, 2023 by the U.S. Department of Commerce, there are further signs of “alignment of the export control with CHIPS Act,” which will reinforce U.S. export controls against China as well.

In response, South Korea has worked on its own version of CHIPS Act, called the K-CHIPS Act, in order to support domestic semiconductor companies and for them to “not lag behind their competitors from United States, Taiwan and China” in the semiconductor manufacturing sector. Originally, the K-CHIPS Act offered an 8% tax deduction rate for investments related to semiconductor productions and technology. However, President Yoon called for the amendment of K-CHIPS Act so that it can match the 25% investment tax credit of United States and other major countries related to semiconductor productions. Initially, the two major political parties had a political dispute on this expansion. However, on March 30th, 2023, South Korea National Assembly passed bill on expanding tax incentives for chipmakers, showing official agreement on the need to expand K-CHIPS Act.

While South Korean companies continue to raise concerns over the CHIPS ACT, there have not been any concrete or explicit measures taken by South Korean companies other than Samsung and SK Hynix receiving a one-year waiver from the export control. However, it is also true that these companies continue to show concern on the matter of both enactments, leading to the need for the South Korean government to continue to engage with the United States and strengthen the domestic semiconductor industry.

Despite taking steps in response to CHIPS Act, South Korea and the United States still need to engage in a more sustained process. Bilateral discussions between U.S. government and South Korean government such as SCCD (Supply Chain and Commercial Dialogue) and efforts to discuss matters related to semiconductors must be continued. Through these discussions and dialogues, South Korea and U.S. government will be able to deepen their economic ties, leading to strengthened cooperation between the South Korean and U.S. semiconductor industries which will be mutually beneficial for the future of semiconductor industries in both countries.

Hyunjin Hwang is a Research Intern with the Korea Economic Institute of America, interested in issues related to international trade and foreign affairs. The views expressed here are the author’s alone.

Photo from Shutterstock.

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