From smartphones to LED light bulbs, we have silently encircled our life with computer chips. The chip – also called a microchip or integrated circuit (IC) – is a set of small but powerful circuits embedded in a piece of silicon that can control the electric current. Each piece is packed with billions of microscopic electrical components such as transistors, resistors, and capacitors. 

The unspoken legend that pioneered this industry in the Republic of Korea (ROK) was Kim Choong-ki. Nowadays, the ROK is one of the most sophisticated global producers of this chip technology, accumulating over USD 129 billion in 2022 – which is 18.9% of the nation’s total exports. 

The main chip-producing firms in the ROK are Samsung Electronics and SK Hynix which served as one of the most important drivers for the country’s economy. For instance, in 2022 South Korea’s GDP stood at USD 1.6 trillion with Samsung and SK Hynix contributing over 281 trillion won (USD 216 billion) and 7.5 trillion won (USD 5.8 billion) respectively. Moreover, the two companies globally accounted for about 50% of flash memory chips and 70% of Dynamic Random Access Memory (DRAM) chip production. 

The ROK’s comparative advantage in the chip industry is with its production of high-volume memory chips, specifically DRAM and NAND chips used for memory storage in electronic devices. This makes South Korea an important player in the chip supply chain. Japan and Europe are more into speciality chemicals and silicon wafers (used in automotive and high-performance computing) and chip manufacturing equipment and materials, respectively.

However, South Korea is facing challenges with other potential chip-producing actors growing in the global market. Those players – Taiwan, Japan, China, and the United States (US) – just to name a few – are competing fiercely in the market while the Netherlands and Germany are also in the circle. Despite the chip-making industries’ differences in comparative advantage, the stiff competition in the global market comes more from real technological capability. TSMC (a Taiwanese chip producer) and Samsung are racing to pioneer the 3nm nodes and to improve their chip performance and energy efficiency while Intel (a US chip maker) is working to compete with TSMC and Samsung in the 7nm and 5nm technology nodes. 

With the significance of these chips to both global consumers and producers, governments are weaponizing the technology. This Chip War is a geopolitical and strategic competition between the US and China for domination in the semiconductor industry. This competition emerged from Washington’s anxiety over Beijing’s use of advanced semiconductors in its military build-up, which in turn is aimed at surpassing the current US hegemony. The rivalry was evident in 2018 when former US President Donald Trump cut supplies between American producers and the Chinese semiconductor manufacturer Fujian Jinhua Integrated Circuit with the accusation that China had stolen and forced the transfer of US technology to improve Beijing’s military systems.

After Trump, President Biden also kept the legacy of his predecessor and managed to convince the Netherlands, in March 2023, to join the campaign of blocking their chip technology sales to China and establishing export controls to the Chinese chipmakers. More importantly, in 2022, the US Congress passed the Chips Act to strengthen the domestic semiconductor industry – including design, research, and manufacture. In October 2023, Washington announced another export limit upon US firms, aimed at crippling the Chinese semiconductor dependence on the US. However, these restrictions hurt South Korea’s chip industry as well.

President Joe Biden signing the Chip ACT. Source: CNBC

The ROK’s semiconductor juggernauts – SK Hynix and Samsung – instantly felt the constraints of the US Chips Act. Apart from the export limit, under this act, the US government will pour USD 53 billion in subsidies, for both domestic and foreign chip makers, to establish their factories on US soil. But to receive that incentive, chip makers must not use the subsidized fund to expand their production in China for the next 10 years. This will prevent the two giants from upgrading their chip capacity in China – limiting their growth and revenue. And to benefit from the US subsidy, they will have no choice but to re-evaluate their investment in Beijing. 

The Chip Act will make the US a more profitable place for semiconductor foundries. This is good news for Samsung as it is building a semiconductor foundry in Texas. But the extremely bad news is that the ROK’s foundries inside China will be prohibited from importing advanced semiconductors from the US making semiconductor trade harder and more costly.

“We are taking a direct hit,” said Chey Tae-won, SK Hynix’s chairman, “If we give up on the Chinese market, we will not be able to recover…we must overcome it as a team between the government and companies.” 

Not just the chairman, but also the ROK’s President Yoon Suk-yeol believed that “geopolitical issues have become the biggest risk for companies to manage…companies can’t resolve this problem alone.”

With semiconductors making up 20 per cent of the overall exports of South Korea, the US-China competition is a major blow to South Korea’s economy. Hence, in order to tackle this issue, Seoul has been promptly trying to implement two different but complementary solutions – diversification and negotiation. 

Firstly, the ROK has attempted to boost its cooperation with other chip-producing countries such as the Netherlands, the US, and Japan. Despite setbacks and complications prior to the visit, President Yoon’s trip to the Netherlands – a major ROK chip client – in December 2023 was Seoul’s active effort to strengthen cooperation between the two countries, as the trip mainly was focused on semiconductors.

While Japan – ROK semiconductor cooperation is still in talks, the US and South Korea held many discussions on ways to build a sustainable and firm supply chain. Moreover, they also planned to establish joint technological development between Washington and Seoul. This will enhance South Korea’s chip quality and capacity even further. 

Secondly, considering the Chip ACT by the US, the ROK government has been extremely active in exploring strategies to safeguard its semiconductor businesses with the US. For instance, 122 South Korean business heads accompanied President Yoon during his state visit to Washington in 2023. The goal was to find better opportunities, support, and compromise for the Korean Chip Industry with the Act freshly enacted.

The result of this effort was quite promising for Seoul. Washington announced in October 2022, a one-year exception for the ROK’s chipmakers from certain US export controls on exporting high-tech equipment to China. This was a huge relief for the chip makers as the exemption will minimize their disadvantage continuing their tech business in China. And it did not stop there. The diplomatic effort also resulted in positive signals from the US to ROK’s chip manufacturers about a possible extension of this Chip Act exemption.

Despite being one of the global chip makers, the tug-of-war between the US and China in the semiconductor industry also directly impacted the ROK. The White House’s “Chip Act” has not only complicated Beijing’s microchips import but also crippled previously high South Korean chip sale numbers to China. President Yoon is tackling this geopolitical complexity by forging partnerships abroad and through continuous negotiation with Washington to relieve the US export controls. It is still unclear whether these efforts will be able to help the ROK overcome the current disarray. The ROK semiconductor’s future will depend on Seoul’s ability to foster new partnerships and carve a path for sustainable growth despite the US-China tech rivalry.

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