Japan Offers Over 5 Trillion Won in Subsidies to Attract TSMC Semiconductor Factory... WTO Complaint Possible?

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] Concerns have been raised that the Japanese government's plan to attract a new factory of Taiwan's TSMC, the world's largest semiconductor foundry, to Japan by providing massive subsidies could become a target for a World Trade Organization (WTO) complaint.

Wei Zhejia, CEO of TSMC, announced on the 14th that the company plans to establish a new factory in Japan producing semiconductors using 22 to 28 nanometer (nm = one billionth of a meter) process technology.

TSMC began constructing the Japanese factory in Kumamoto Prefecture, where Sony's semiconductor plant is located, in 2022, and plans to start mass production in 2024.

In this regard, Japanese Prime Minister Fumio Kishida mentioned the confirmed attraction of TSMC's new factory, which has been under negotiation since 2019, during a press conference on the dissolution of the House of Representatives on the evening of the 14th. He stated that support measures for large-scale private investments totaling 1 trillion yen (approximately 10 trillion KRW) will be included in the new economic policy.

Prime Minister Kishida explained that the construction of the TSMC factory will enhance Japan's semiconductor industry's autonomy and significantly contribute to economic security, which is the reason for the government's decision to provide support.

The Japanese government is expected to reflect the subsidies in the supplementary budget for fiscal year 2021, which will be prepared after the House of Representatives election at the end of this month.

According to Asahi Shimbun, based on Prime Minister Kishida's remarks, the total investment for the TSMC new factory is about 1 trillion yen, and the government is considering supporting half of that amount, approximately 500 billion yen.

Regarding this, Nihon Keizai Shimbun predicted that depending on the method of providing subsidies, there could be controversy over whether it complies with WTO rules.

The Japanese government's subsidies are likely to be supported using funds operated by the New Energy and Industrial Technology Development Organization (NEDO), which is under the Ministry of Economy, Trade and Industry.

It is reported that the Japanese government plans to impose an obligation on TSMC to prioritize supplying products to the domestic market while providing subsidies, and if TSMC fails to fulfill this obligation due to business withdrawal or other reasons, it will be required to return the subsidies.

Nihon Keizai pointed out that while the Japanese government's policy direction is to have the state take responsibility for securing semiconductors, which have become essential goods like food and energy, rather than leaving them to market principles, there is concern that massive subsidies justified by economic security could distort the market, potentially leading to violations of WTO rules.

The 'red subsidies' that are immediately considered violations of WTO agreements include subsidies supporting exports and those conditioned on using domestic components or materials. Although the subsidies Japan intends to provide to TSMC are not red subsidies, the general view among trade law experts is that they fall under 'yellow subsidies,' which require case-by-case legality assessments.

Nihon Keizai analyzed that if semiconductors produced at the subsidized factory are supplied at low prices within Japan, countries like South Korea, which have semiconductor manufacturers, might file complaints claiming damage due to reduced exports to Japan. There is also a risk of complaints if TSMC exports products from the Japanese factory at low prices.

However, it is noted that cases recognized as violations of yellow subsidies are currently limited to a few under the existing system, and proving the causal relationship between the damage to the complainant country's industry and the subsidies is not easy.

Nihon Keizai explained that the reason the United States and the European Union have not filed complaints despite raising issues about China's massive subsidies to its semiconductor industry is due to such background.