South Korea's tangled path in economic diplomacy
IPEF and the Chip 4 alliance highlight the push and pull of South Korean interests and the pressures on the country as it tries to keep a balance between the US and China
SEOUL - With a strongly pro-America leader in Mr Yoon Suk-yeol, the expectation was that the United States would have little problem in getting South Korea on board with its initiatives aimed at rallying like-minded partners against China.
For instance, there is the Indo-Pacific Economic Framework (IPEF) as a new means to link transpacific economies while plugging the gap left by America's pullout from the Trans-Pacific Partnership.
South Korea was an early signatory to IPEF. Seoul has an interest in the framework's potential in diversifying and strengthening the resilience of its supply chains at a time of global geopolitical uncertainty and economic disruption. South Korea also hopes to play a role as a rule-maker within IPEF.
That said, the political leanings of President Yoon are just one factor in the wider interplay of South Korean-US relationships and this runs up against the realities of American domestic political interests and Seoul's relations with China.
The promise of IPEF is complicated by Washington's newly passed Inflation Reduction Act, whose tax credits to electric vehicles manufactured in North America would put Korean manufacturers at a disadvantage.
The same complications are at play in another US initiative - the Chip 4 alliance, aimed at curbing China's growing capability in the semiconductor industry.
South Korea is deeply ambivalent about the alliance as it could not ignore Beijing's objection and constant reminders for Seoul to remain neutral.
China is, after all, South Korea's largest trade partner and imported US$50 billion (S$70 billion) worth of chips from the country last year. This accounts for nearly 40 per cent of South Korea's total chips export, or 60 per cent if including Hong Kong.
As chairman Chey Tae-won of South Korean conglomerate SK Group said: "Like it or not, China is a huge market and abandoning it is not an option."
To exclude China from a global supply chain by joining Chip 4 is also to risk offending the Asian giant and triggering retaliation.
The South Korean government has so far described Chip 4 as a consultative body, not an alliance, and is expected to push for supply chain cooperation that does not exclude any specific country.
"One could be sympathetic towards South Korea for being stuck in the US-China rivalry," visiting scholar Lee Seong-hyon of Harvard University's Fairbank Centre told The Straits Times.
"Seoul's chip industry continues to rely on advanced patents from the US, while China is the largest market for South Korea's chips. Seoul is thus vulnerable."
K-chip leverage
South Korea has strong leverage in the chip business, with two of its homegrown companies, Samsung Electronics and SK Hynix, being the world's top two largest manufacturers of memory chips, respectively.
US President Joe Biden's first stop during his visit to South Korea in May was Samsung's Pyeongtaek plant, a move that underscored the company's importance in the global supply chain and US plans to regain dominance in the chip industry after losing out to Asia.
China "desperately needs South Korea's chips too", said Harvard's Dr Lee.
He pointed to how Chinese President Xi Jinping emphasised the importance of supply chain cooperation when he congratulated his South Korean counterpart on his election over a phone call earlier this year.
"The unusual suggestion... shows that Seoul doesn't have to feel like an underdog," said Dr Lee. "It is China that needs chips from South Korea."
Sungkyunkwan University's electronic engineering professor Kim Yong-suk, who is also vice-president of the Institute of Semiconductor Engineers, said that Korean chipmakers "contribute to global industrial development through chip design and manufacturing with America's proprietary technologies".
"China also benefits," he wrote in a commentary in JoongAng Ilbo newspaper. "China must not oppose Korea's Chip 4 participation by using its market as a weapon."
Chinese leverage
But China has indeed been vocal against Chip 4 and Seoul knows that an unhappy Beijing will strike where it hurts.
China's economic retaliation against South Korea's 2017 deployment of a US anti-missile shield known as Thaad cost South Korea at least US$7.5 billion in economic losses and caused bilateral ties to grind to a halt.
South Korea has since managed to diversify its trade and investment with South-east Asia and other regions to make up for the losses, but Seoul has also become more reliant on Beijing in other ways.
The Hyundai Research Institute pointed out in a recent report that South Korea's semiconductor trade with South-east Asia, Taiwan, US and Japan is "structurally centred around China".
It pointed out that China is the second-largest exporter to South Korea for 18 types of semiconductor materials, and that Korean companies imported 24.2 per cent of their semiconductor materials from China last year - up from 12.7 per cent in 2010.
This means US-China trade disputes and supply chain disruptions could result in "serious production setbacks" for South Korean chipmakers, the report added.
Some experts believe Beijing will not retaliate against Seoul for joining Chip 4 because China needs South Korea's chipmaking expertise to grow its own chip industry.
Mr Kim Young-woo, the head of research at Seoul-based SK Securities who also advises the South Korean government on semiconductor policy, said China needs South Korea's help in its leapfrog strategy. While China sold around US$150 billion worth of semiconductors last year - almost three times the volume in 2015 - it is still lagging behind South Korea in terms of technology.
"The success of this strategy depends on how quickly product development plans take place and how well prepared a company is to mass-produce them," he told The Korea Times. "Chinese chipmakers are far behind Korean companies and that means China needs Korea's support over the next few more years, at least, to keep its technology industry working."
Even so, Beijing is likely to continue to use the Thaad issue - and along with it, the fear of economic retaliation - as a warning to Seoul. "China will bring it back to the table whenever it wants to pressure South Korea," said Dr Lee. "China knows that South Korea will not withdraw Thaad, but thinks the issue could be useful in coaxing South Korea's concessions in other areas, such as semiconductor and supply chain issues."
Chip diplomacy
Meanwhile, the US has been sending one senior official after another to East Asia to shore up support for Chip 4.
In the wake of US House Speaker Nancy Pelosi's controversial Taiwan visit last month, five American lawmakers visited Taipei. Besides meeting Taiwan's leader and other officials, the delegation also met members of the private sector to discuss investments in semiconductors. Similar meetings were also held when the governors of Indiana and Arizona visited last month.
Additionally, US Vice-President Kamala Harris is due to visit Seoul on Sept 29, barely three months after Treasury Secretary Janet Yellen called for "friend-shoring" to build more stable supply chains during her trip to South Korea.
Experts said the frequency of visits reflects US urgency in sealing a deal, but may backfire if Washington is seen as trying to bulldoze its way through without properly addressing the concerns of its partners.
Said Dr Lee: "Washington should be careful not to be seen as 'another bully', other than China. That is a sure way to lose the hearts and minds of the public in the region."
He also pointed out that US allies will question if Washington is unable to provide any alternative markets to replace China. "They are willing to join Team USA, but they will expect that America needs to provide a way to reduce their market losses, such as by opening a wider US market," he said.
South Korean chipmakers are already feeling the jitters after America's Chips and Science Act took effect on Aug 9. A part of the Act prohibits chipmakers receiving US subsidies from building new or expanding factories in China, effectively cutting off investments in China that are needed to keep up with advancements in technology.
Both Samsung and SK Hynix run factories in the US and have pledged more investments worth billions of dollars, but they operate plants in China at the same time.
The Yoon administration is now under pressure to find a diplomatic solution.
Electronic engineering professor Park Jea-gun of Hanyang University told Hankyoreh newspaper that South Korea should join Chip 4 so as to ensure a stable supply of US chipmaking equipment and materials but, at the same time, negotiate well with the US to allow Korean chipmakers to retain their factories based in China.
Asia specialist Sean King of New York-based consulting firm Park Strategies noted that the free world is already moving away from China-made chips, in line with a decoupling that Beijing itself set in motion as it sought to create and use its own technology for surveillance purposes.
"Sooner or later, once they're no longer needed, Beijing will likely boot South Korean technology providers out of the Chinese market anyway," he told The Straits Times. "Hence, joining Chip 4 now would only accelerate South Korea's move into the non-authoritarian, markets-driven technology camp where it so clearly belongs."
Whatever decision the Yoon administration makes, it is clear that by whatever name it is called, IPEF or Chip 4, there is no easy path ahead to separate economics from geopolitics.
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