[Why&Next] 'Yososu·Huawei' China's Calculated Provocation?..."Korea Must Respond in Advance"

Huawei's 7nm Semiconductor Counterattack... "Provoking the US"
Possibility of Accelerated 'Resource Weaponization' Against US Containment
Highly Dependent South Korea... Economy Wobbles Despite China's Gesture
However, China Also Faces Economic Downturn, Likely to Restrain Expansion

Since last week, the Korean economy has been stirred by rumors of China halting exports of urea solution and Huawei's launch of the latest smartphone equipped with 7-nanometer (nm) class semiconductors. Urea solution showed signs of scarcity due to supply instability, and the Huawei incident has further increased uncertainty in the semiconductor industry, which was already experiencing a slow recovery. In conclusion, neither issue has yet been severe enough to cripple the Korean economy immediately, but due to high dependence on China, even small shocks have caused significant fluctuations.

The bigger problem is that China may escalate such provocations against the U.S. and South Korea in the future. If China moves to control exports of key strategic minerals such as lithium or nickel instead of urea solution, our secondary battery and semiconductor industries will inevitably suffer major damage. Furthermore, if U.S.-China conflicts intensify through measures like 'banning government officials from using iPhones' or 'developing semiconductor circumvention technologies,' Korean companies caught in the middle will inevitably face reduced sales.

Photo by Jinhyung Kang aymsdream@

According to the industry on the 12th, there is an analysis that the 'supply chain war' triggered by U.S.-China conflicts is intensifying amid rumors of China restricting urea exports. This issue arose after Bloomberg reported on the 7th that the Chinese government had instructed some domestic fertilizer companies to halt urea exports. Although the Chinese government has not officially stated its position, since Zhongnong Group, the largest urea producer in China, declared a reduction in exports, it is highly likely that government influence is involved.

South Korea, having already experienced a urea solution crisis two years ago due to China's export restrictions, finds it difficult to easily overcome this situation. Despite the government’s efforts to calm the situation by stating that "there is sufficient stockpile of urea solution," market anxiety has not been easily resolved due to the still high dependence on Chinese imports. Fortunately, this time the export control is limited to fertilizer use, but if export controls begin on manufacturing and automotive urea, on which China’s import dependence exceeds 90%, a second crisis is quite possible.

The industry is already quite anxious about the increasing number of export control items, following gallium and germanium, now including urea. China holds the world’s largest market share in 33 out of 51 key raw materials used in advanced industries. China’s global influence is also significant in the top 10 strategic core minerals (lithium, nickel, cobalt, manganese, graphite, and five rare earth elements) that are essential for South Korea’s electric vehicles, secondary batteries, and semiconductor supply chains.

Huawei’s launch of its latest smartphone, the 'Mate 60,' showcasing 7-nanometer semiconductor technology, is a similar case. Whether China has genuinely succeeded in semiconductor localization by overcoming U.S. restrictions or is merely provoking the U.S., it is expected to have a negative impact on the Korean economy. If China accelerates semiconductor technology development, it will be unfavorable for Korean semiconductor companies, and if the provocation intensifies U.S.-China conflicts, market contraction could cause direct and indirect damage.

Jeon Byung-seo, director of the China Economic and Financial Research Institute, described Huawei’s smartphone launch as "a highly calculated provocation," explaining, "Considering China’s situation, it seems aimed at promoting the message that the U.S. is not an insurmountable force and that China can break through U.S. restrictions, despite the U.S.’s technological blockade."

In fact, the Chinese government is confronting the U.S. head-on by issuing a 'ban on iPhones for government officials.' Given Huawei’s release of the latest smartphone, this ban could stimulate patriotic consumption among Chinese people and potentially lead to an iPhone boycott movement. Last month, when Japan discharged contaminated water from Fukushima, the Chinese government effectively encouraged a boycott of Japanese products by flooding state media with critical articles.

Bank of America (BOA) estimated that China’s recent measures could reduce annual iPhone sales by 5 to 10 million units, which would also impact domestic companies such as LG Innotek and LG Display, key partners of Apple.

If U.S.-China conflicts escalate, South Korea’s exports and gross domestic product (GDP) will also be affected. Earlier this year, the Bank of Korea explained in a report titled 'Future Global Supply Chain Risks and Implications' that "if South Korea’s exports are directly or indirectly affected by U.S.-China trade conflicts, nominal total exports could decrease by 1.0 to 1.7%, and real GDP could decline by 0.1 to 0.3%."

Park Sang-hyun, a researcher at Hi Investment & Securities, pointed out, "Looking at the series of developments, it can be interpreted that China’s counterattack against the U.S. has begun. If China’s counterattack is indeed real, it will be difficult for the domestic economy and the Korean won’s value to avoid negative impacts."

However, there is also an analysis that China may find it difficult to further escalate the conflict. Given the already poor domestic consumption and exports, intensifying conflicts with the U.S. may not be a good decision from China’s perspective. Choi Won-seok, deputy researcher of the Economic Security Team at the Korea Institute for International Economic Policy, emphasized, "Because the U.S. and China’s supply chains are so tightly intertwined, it will be difficult to weaponize resources further. However, we also need to prepare in advance for any possible scenarios."