US Semiconductor and Supply Chain Investigation to Conclude This Week... Focus on Level of China Exclusion

Timing and Scope of Result Disclosure Undecided
Complex Calculations Amid US-China Tightrope Walk

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Moon Chaeseok] The investigation conducted by the United States to reorganize the supply chains of key items such as semiconductors and batteries is concluding this week.

It remains uncertain whether the U.S. government will disclose the investigation results immediately, a few days later, or not at all, and the specific contents have not yet been clearly revealed.

However, it is widely expected that the findings will include measures to check China, and South Korea may find itself in a situation of 'tightrope walking' between the U.S. and China.

U.S. Conducts 100-Day Supply Chain Investigation of Key Items... Aimed at Checking China

According to the Ministry of Trade, Industry and Energy and the Korea Institute for Industrial Economics and Trade on the 30th, the U.S. government’s 100-day supply chain investigation targeting four key items?semiconductors, batteries, rare earth elements, and biopharmaceuticals?will conclude on the 4th of next month (local time). President Joe Biden signed an executive order directing the supply chain investigation on February 24.

The stated purpose of this investigation is to strengthen the manufacturing base of key items whose vulnerabilities were exposed after COVID-19, but underlying it is an intention to reduce dependence on China and enhance the competitiveness of domestic industries. China is aggressively developing semiconductor and battery technologies. The U.S. imports a significant portion of rare earth elements and pharmaceuticals from China.

The core focus of this investigation is semiconductors. Experts analyze that it reflects the U.S.’s mid- to long-term national strategy to dominate advanced industries and curb China’s rise.

It is uncertain when and to what extent the U.S. government will disclose the investigation results. The investigation period may also be extended.

An official from the Ministry of Trade, Industry and Energy said, "We are in continuous contact with the U.S. government regarding this matter, but the U.S. side has stated that nothing has been decided about the timing or content of disclosure," adding, "We are examining the prospects of the results and their impact on our industries at the intergovernmental level."

Depending on the future intensity and scope of U.S. sanctions, South Korea is expected to face significant impacts across the entire supply chain. This is because the export share of semiconductors to China (including Hong Kong) exceeds 60%, and South Korea is a key country in the Northeast Asian supply chain on which the U.S. relies for advanced semiconductor procurement, including Taiwan and Japan.

Strengthening Alliance Cooperation and Increasing Support for Domestic Companies Expected

The U.S. government is reportedly considering measures to reduce dependence on China by strengthening supply chains of key items through cooperation with allied countries or encouraging domestic production.

If the focus is solely on expanding and strengthening supply chains with allies, it is expected to work favorably for South Korea due to increased demand. Cooperation in system semiconductor foundry (semiconductor contract manufacturing) is also anticipated.

In the battery sector, if the U.S. restricts imports of Chinese batteries, domestic battery demand may increase, which is seen as a positive development.

However, if the U.S. induces foreign companies possessing advanced semiconductor process technologies to invest in new production facilities within the U.S., it could become a burden for companies.

South Korean companies have already pledged investments of $17 billion in the semiconductor sector (Samsung Electronics) and $14 billion in the battery sector (LG Energy Solution, SK Innovation) following the Korea-U.S. summit.

The U.S. is also likely to strengthen support for its domestic companies to curb the semiconductor dominance of South Korea and Taiwan. The U.S. Senate is reportedly about to propose a bill to provide $52 billion over the next five years to promote the U.S. semiconductor industry.

Although unlikely, the U.S. might pressure allied countries to reduce or halt transactions with China through sanctions or other measures.

For example, the U.S. could restrict exports of Korean semiconductor materials, parts, and equipment (materials, parts, and equipment) containing U.S. intellectual property and technology to China, or demand switching procurement sources for basic materials and general-purpose parts mainly sourced from China.

Significant Impact on Domestic Companies and Industries... China’s Backlash Also a Key Factor

Regardless of the recommendations arising from the investigation results, the impact on companies and industries in South Korea is expected to be substantial.

An analysis by the Federation of Korean Industries on the economic impact if the U.S. replaces imported semiconductors with domestic ones due to U.S. semiconductor industry support showed that South Korea’s GDP decline (-0.07%) was the second largest after China (-0.35%).

Production in the electrical and electronics industry, which includes semiconductors, is expected to decrease by 0.18% in South Korea, the second largest impact after China (-0.32%).

Above all, if China strongly protests the U.S. investigation results, there are concerns that domestic companies, which have large markets in both countries, may face a dilemma where it is difficult to side with either.

Professor Ahn Deok-geun of Seoul National University said, "If our companies build stronger supply chains with the U.S., they may face difficulties managing the market and industrial base in China, which is another large market."

Lee Jun, head of the Materials Industry Division at the Korea Institute for Industrial Economics and Trade, also analyzed, "So far, there have been no measures strongly opposing China, including investments in the U.S., and China has not publicly expressed dissatisfaction. However, if the U.S. presents a strong supply chain reorganization plan that completely excludes China, it will clearly affect China’s interests, which could put us in a difficult position."

Experts also pointed out that domestic industrial infrastructure could weaken while being caught in the U.S.-China hegemonic competition.

Professor Ahn said, "There is a positive aspect in that companies are absorbed into and incorporated within the U.S. supply chain and operate their businesses stably, but we must recognize that this could weaken the domestic industrial base."

Lee also advised, "If local production in the U.S. increases, exports will eventually decrease, and good domestic jobs will also decline. Especially for materials, parts, and equipment companies, which face considerable risks and must enter overseas markets together, policies supporting the domestic industrial base must be implemented in parallel."