The United States will find the next target for sanctions, and South Korean semiconductor experts call for early preparations

The U.S. Department of Commerce's Bureau of Industry and Security (BIS) issued sweeping new controls on chips and chip equipment shipped to China on October 7. The controls are aimed at banning unauthorized shipments of chip equipment such as graphics processing units (GPUs) and integrated circuits to China to limit the local ability to produce advanced chips, develop supercomputers and further develop the chip business.

When the United States launches a chip war, it is expected to use all policy means to cultivate the domestic chip industry and increase pressure on China. Shortly after taking office, U.S. President Joe Biden issued an executive order to investigate the supply chains of U.S. manufacturers. His move heralds a stronger boost to the campaign that his predecessor, Donald Trump, has begun to rebuild the U.S. chip industry.

In July, the "Chips and Science Act" allocated $52 billion to establish a chip supply chain in the United States, and passed subsidies and tax incentives with bipartisan support. Before South Korea, whose economy relies heavily on chip trade, responded, Washington introduced one chip policy after another. Others are quickly jumping on the bandwagon. Japan, Taiwan and the European Union have pledged huge investments in the chip sector and are fiercely competing to attract chip facilities to their turf.

Although the chip industry is important to the national economy and future, unfortunately, South Korea has not done enough. The People's Power Party (PPP) Special Committee on Semiconductors drafted a bill to strengthen chip competitiveness and submitted it to Congress in early August. But the review has not yet begun. The Strategy and Finance Committee has not even set up a subcommittee to discuss tax benefits for chip investments. Much of the chip support in the 2023 budget outline has been rejected or scaled back.

Compared with the fierce competition abroad for chip hegemony and self-sufficiency, South Korea seems too laid-back. Lawmakers and policymakers may view the chip race as limited to the United States and China rather than a pressing existential issue for the country.

But South Korea cannot avoid the growing fighting. The U.S.’s export restrictions on chip equipment to China are one example. Washington has provided a one-year grace period to companies such as Samsung Electronics and SK hynix, but after the grace period ends, South Korea's memory chip business in China may be affected. Orders from fabless chipmakers such as Nvidia and AMD are also likely to decline due to a de facto ban on exporting GPU chips to China.

The global chip race may currently be between the two superpowers, but could extend to South Korea. In key industries and technologies, friends are not forever. For example, Japan dominated the global semiconductor market until the 1990s, but U.S. sanctions on Japanese chip exports caused a sharp decline in the Japanese chip industry.

Japan dominated the global chip market in the 1980s and 1990s, accounting for 80% of the dynamic random access memory (DRAM) market. To protect its declining industries and address its growing deficit with Japan, the United States forced the yen to appreciate through the 1985 Plaza Accord and imposed a ¥100 levy on Japanese computers, chips, and other high-tech imports under the Trade Section 301 of the 1974 Act. tariffs on dollars, not to mention getting concessions from Japan, not selling chips below a certain price. This has caused Japanese chip manufacturers to slowly lose their competitiveness.

In 1990, six Japanese companies, including the top three—NEC, Toshiba, and Hitachi—dominated the industry. But now, Samsung Electronics and SK hynix have taken over the Japanese names.

The decline of Japan's chip industry can bring trouble to South Korean chip manufacturers, but the United States has always taken action to protect its domestic industry. After China, the United States can look for its next opponent to eliminate.

In semiconductor technology, the United States will find South Korea and Taiwan as its biggest competitors. Intel has managed to advance its chip manufacturing process to 7 nanometers. But South Korea and Taiwan have already rushed to the 3nm process. It remains uncertain whether the U.S. will continue to benefit Korean chips if it manages to rebuild its downstream industry.

Although South Korea remains on the periphery of the U.S.-China chip competition, the United States has been accelerating its efforts to adjust the chip value chain. It has funded US memory maker Micron - which has been assembling chips in Japan, Taiwan and Singapore - to build a massive factory in New York state. U.S. funding doesn’t stop at attracting U.S. entities.

Samsung Electronics has applied for Texas' chip incentive program to build a $17 billion foundry, pledging to invest nearly $200 billion over the next 20 years. The chipmaker would not have thought of making such a large investment in the United States without a generous incentive package, and South Korean politicians must rethink their preparations for the investment. Thanks to their honing, South Korean companies are helping the U.S. restore its chip value chain. South Korea risks losing its most prized technological hegemony.

Macroeconomic conditions are also not favorable for Korean companies. The dollar was 1,200 won at the beginning of the year and is now hovering above 1,400 won. Raw materials are already expensive. But the cheap currency has raised costs for Korean companies by about 20%.

Cheap currency usually benefits exporters. But with currencies around the world weakening against the dollar, that formula doesn't work. Large exporters are no longer safe. However, when the issue of chip support comes up, there is a knee-jerk pushback from lawmakers to favor big companies. Now a new perspective is needed.

The chip industry is a highly closed field because economies of scale determine competitiveness. Therefore, chip manufacturing can only be attempted by large companies. Other countries are no exception. Only with reliable large companies can downstream industries prosper. Chinese Taipei regards TSMC as the "sacred mountain that protects the country."

The environment for South Korea's chip industry has become more hostile than in 2019, when Japan imposed export restrictions on the export of materials needed for chip manufacturing to South Korea. The presidential palace, government and politicians have made concerted efforts to reduce the impact on the local chip and components industry. I serve as vice-chairman of the Special Committee on Japan's Economic Offensive, discussing measures with industry, engineers and the government. Therefore, support measures for the materials, components and equipment value chain have been developed.

In the field of chip manufacturing, we are at a turning point where we can defend our hegemony or lose it. The most important thing is to maintain unparalleled technological advantages in chip manufacturing. The government must provide help in terms of manpower, incentives and institutions to be on par with competing countries to make Korean chips indispensable in the global high-tech ecosystem.

We (South Korea) need to establish a permanent special committee for chip support, composed of experts from government, legislative bodies, industry and academia. The political establishment is often unaware of the exigencies of the industrial sector. The Standing Committee must bring in experts in the field.

The special committee must keep up with international trends, pay close attention to industry setbacks, and formulate the best strategies. To provide effective help, industry experts must lead the group. There isn't much time left.

We urgently need a special committee on semiconductors to promote prosperity for generations to come.

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