[Flexible diplomacy and enhanced government support for chip industry needed amid rising US-China tension]
Semiconductors constitute key export items for South Korea as well as pillars of the country’s economy. However, unfortunately, that is also the case for other countries as the global competition to secure cutting-edge technology in the semiconductor industry has heated up. In fact, the competition between China and the US to get the upper hand in the race has intensified, which has placed Korea in a tricky position as both countries are important trading partners. As such, calls have mounted for effective and flexible diplomacy to address the situation.
As liberal democratic states, close alignment with the US and elevated bilateral ties are necessary but this needs to be done in a way that minimizes impact on the domestic economy which is heavily dependent on China. Indeed, in the semiconductor industry, China makes up the largest share of Korea’s exports. As such, the Korean government needs to mobilize all available communication channels to effectively negotiate with the US government amid the ongoing race. For example, the latest US CHIPS and Science Act, which was introduced with the aim of hampering China’s rise in the industry, has put Korea in a very difficult position as it restricts the expansion of semiconductor manufacturing capacities in China where Korea’s largest chipmakers---Samsung Electronics and SK hynix---- run their memory-producing plants. Inability to invest in China-based plant heavily limits the two companies’ production capacities. As the rule applies to all countries seeking to obtain subsidies from the US government, the Korean government needs to closely cooperate with the US to convince it to give more leeway to Korean companies.
Indeed, Korean diplomacy has generated some positive outcomes regarding the CHIPS Act. The US government recently decided to allow the export of advanced chip manufacturing equipment for China-based plants by Samsung and SK hynix by designating the two companies as exceptions to some of its rules. Such an outcome came after the Korean government’s concerted efforts in negotiating with the US before finalizing the guardrails of the CHIPS Act.
The global rivalry between the US and China is only bound to rise. As such, going forward, the Korean government needs to execute its diplomatic expertise to secure exemptions and more leeways for Korean companies as it has done earlier. Another way it can do this is by negotiating some terms in exchange for joining the US-led alliance. For instance, the US expects Korea to join the CHIP-4 alliance, which is highly likely to incur China’s ire and invoke its retaliation against Korea’s economy if materialized. In such an environment, the Korean government needs to actively communicate this concern to its US counterpart and secure exclusive benefits in future deals with the US in exchange for joining the US-led alliance.
While flexibility is highly in demand for a country’s diplomacy, at home, more research and development efforts are needed to enhance the competitiveness of the semiconductor industry. For this, increased government support and investment are indispensable. Currently, many countries including the US, Japan, and China have been rolling out colossal tax incentives to nurture the semiconductor industry. Korea also needs to follow suit. Its tax exemption, currently set at 15 percent for large firms and 25 percent for small and medium-sized businesses, does not compare to the extent of tax incentives offered by other countries, rough estimates show. Apart from relaxing tax regulations on domestic firms, the Korean government needs to actively invest in advanced chip-making facilities in the country. Earlier, Samsung and SK Hynix announced a combined investment of 622 trillion won to establish a semiconductor cluster in Yongin, Gyeonggi Province but expressed concerns over difficulties to secure electricity and water needed to operate the facilities. The Korean government needs to step in to actively remove the hurdles. Indeed, President Yoon Suk Yeol recently vowed enhanced government support for the formation of a massive chip cluster in the area. His words should not be empty echoes merely meant to garner more votes ahead of the impending general election and must be executed as soon as possible to boost the country’s competitiveness in the industry.
While the government’s fiscal support, in the form of tax incentives and subsidies, is important, policymakers should also address the severe shortage of chip technicians and engineers. After all, the increased investments in advanced facilities and their expansion would not yield much-desired effects if there were no skilled personnel to operate them. In recent years, Korea has witnessed a shrinking talent pool in the industry due to the exodus of college students to medical schools from semiconductor-related fields. Such a trend can be largely attributed to the lucrativeness of the medical profession in comparison to the tech field. Hence, the Korean government needs to quickly enhance the job perception of tech fields by promptly improving the compensation level and work environments for engineers and technicians. In recent years, to tackle chronic talent shortage in the semiconductor industry, the government has been collaborating closely with big tech companies, setting up job-guaranteed semiconductor courses at colleges and offering generous scholarships for those majoring in the field. Despite such enticing offers, the government’s initiatives have failed to stop the exodus of bright students to the medical field. As such, the Korean government needs to revise its initiatives by aggressively ramping up resources and investments to widen the talent pool.
To conclude, the Korean government faces a host of challenges amid intensifying US-China rivalry in the global semiconductor industry. In such an environment, a flexible diplomatic approach is highly needed that allows for close cooperation with the US while not antagonizing China and minimizing risk to domestic economy. Meanwhile, at home, more enhanced support from the government, in terms of expanded tax incentives and funding, is indispensable to nurture the national competitiveness of Korea’s semiconductor capacity. Additionally, Korea faces another challenge of dwindling talent pool in the relevant field. For this, massive overhauling of education programs and investment in the field should be done promptly to secure future talent before it is too late.