THE SEMICONDUCTOR industry is one of South Korea’s key industries driving the nation’s economic growth. Since 2013, South Korea has ranked second in the world for its global semiconductor market share, accounting for 19.3% of the global market last year[1]. Yet, Korea tends to rely on China for most of its semiconductor chip exports. For example in 2021, 48% of South Korea’s memory chips went to China[2]. Now, South Korea is on the brink of losing China, its biggest customer, as it faces the dilemma of joining the Chip Four Alliance proposed by the United States. 

The Chip Four Alliance

   On July 28, the U.S. Congress passed the Chip and Science Act—a bill that allocated $52 billion in funds for semiconductor production and research in the United States[3]. As part of this project to boost the United States’ manufacturing prowess, Washington is planning to consolidate a strategic alliance with Japan, South Korea, and Taiwan. The Biden administration first proposed this Chip Four Alliance to its allies in March, and it expects to have them construct their factories in the United States. The United States ultimately aims to combine its own semiconductor technology with Japanese materials and Taiwanese and South Korean manufacturing capabilities. 

   However, the United States’ real intention behind forming this alliance seems to be to target China. The prospective members of the Chip Four Alliance “controlled 73% of the world’s semiconductor equipment, 87% of foundries, and 91% of design and production[4]” even before the formation of the alliance. Once the Chip Four Alliance forms and blockades these elements, the shortage of exported chips to China will isolate Beijing from the semiconductor supply chain and cause production disruption and regression to China’s Fourth Industrial Revolution.  

South Korea’s stance

   As South Korea has to make its decision about joining the alliance by August 31, the United States has been pressuring South Korean President Yoon Suk-yeol and his administration to accept its invitation. During his visit to Korea in May, U.S. President Joe Biden toured one of Samsung Electronics’s semiconductor plants; the company produces 70% of the world’s memory chips. Furthermore, U.S. Treasury Secretary Janet Yellen visited LG Science Park in July. Throughout her visit, she publicly criticized China for disrupting the global economy by using its market position in raw materials to secure a dominant position in the manufacturing of semiconductors[5]. In order to limit China’s influence, Yellen proposed her concept of “friend-shoring,” an alternative term to describe the United States’ aim to build a supply chain among its allies. 

   Aside from pressuring South Korea, the United States is already a key ally for Korea’s regional security, making it more difficult for Korea to refuse its offer. For this reason, Yoon was staunchly supportive of the Chip Four Alliance from the beginning. During his meeting with Yellen in July, he promised to “wholeheartedly support the global leadership of the United States in the fields of economy[6].” Moreover, the Yoon administration has recently promised to take its seat in the preliminary meeting of the alliance that will be held in early September[7]. 

   Despite the decision to participate in the preliminary meeting, the Yoon administration is being exceptionally cautious about the alliance. Yoon’s Foreign Minister Park Jin emphasized that South Korea’s affiliation with the alliance is not to exclude China but is rather a process to expand Korea’s national interests[8]. The Yoon administration’s wary attitude is a result of China’s hostile response to the issue; China has expressed strong discontent toward the Chip Four Alliance, criticizing the United States for engaging in coercive diplomacy. In particular, Chinese Foreign Ministry Spokesperson Lijian Zhao underlined how the United States is forcibly encouraging global decoupling by “undermining international trade rules and splitting the global market[9].” Zhao also warned South Korea not to join the alliance for its own long-term interests of keeping a good relationship with China and called South Korea’s membership in the U.S.-led alliance “commercial suicide[10].” 

Advantages

   Opinions are divided over the benefits of joining the Chip Four Alliance. Some experts say that it is better for South Korea to side with the United States, who owns irreplaceable chip-making knowledge and related technologies. Regarding this, the head of the Special Parliamentary Committee on Semiconductors, Yang Hyang-ja, described the United States as the landlord in the semiconductor landscape, holding key intellectual property for Korea’s chip design[11]. Unlike the United States, China lags in chip design and depends heavily on foreign technology. If Korea sides with China, the only resource China could lend to Korea would be cheap labor. Hence, for South Korea—who has a comparative disadvantage in chip design—it would be more efficient to prioritize Washington’s top fabless companies like Qualcomm over Beijing’s replaceable labor power. 

   Additionally, there are doubts about China retaliating. According to an anonymous high-ranking government official interviewed by The Korea Times, the Chip Four Alliance will not immediately threaten China’s national security, lowering the chance of China taking retaliatory action against South Korea. Moreover, Park Jae-gun (Prof., Dept. of Electronics Engin., Hanyang Univ.) explained that China and South Korea have “symbiotic relations” in the semiconductor industry. He believes that Korea’s membership in the alliance will further China’s interest, making China’s retaliation unnecessary. If South Korea gains good U.S. equipment from the alliance, supplying high-performance chips to China’s IT companies will become much easier and China will be better off for it[12]. 

Disadvantages

   Yet, concerns about South Korea’s chip trade with China remain. Not only would South Korea lose a major client that imported 60% of its semiconductors last year alone, but there would be a periodic setback for South Korea’s semiconductor industry. In recent years, Samsung and SK Hynix expanded their production facilities in China to satisfy its chip demand. While Samsung produced 40% of its chips in the city of Xian, SK Hynix conducted 50% of its production in the city of Wuxi[10]. If Chinese local governments and state-run banks decide to halt their generous incentives for the companies as possible retaliatory action, matching chip supply to growing demand will become difficult. 

   Experts also worry that China will make unpredictable reprisals towards other Korean industries. Kim Young-han (Prof., Dept. of Economics, Sungkyunkwan Univ.) warned, “When you look at how China has acted in the past, if Korea joins the chip alliance, there could be indiscriminate retaliation[13].” In 2016, when South Korea decided to employ the U.S.-made Terminal High Altitude Area Defense (THAAD)—an anti-ballistic missile system—China boycotted South Korean consumer goods, including retails and cosmetics. Therefore, there is fear that South Korea may face a direct hit to the consumer goods industry when it joins the alliance.

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   Despite concerns about damaging consequences, South Korea will most likely become a member of the alliance. The popular opinion is that it is impossible for Korea to neglect U.S. clients and the country’s equipment and software segments for chip production. In this regard, an anonymous Business Korea interviewee stated that South Korea should try to minimize the potential damage from China by pursuing pragmatism between the two economic giants. Whether Korea can successfully maintain this fragile middle ground remains to be seen.

[1] Invest Korea

[2]Reuters

[3]Financial Times

[4] News Drectory 3

[5] PBS

[6]The Hankyoreh

[7]Korea JoongAng Daily

[8]The Korea Times

[9]The Korea Times

[10]The Korea Herald

[11]Korea JoongAng Daily

[12]South China Morning Post

[13] Asia News Network