South Korea as a Case Study in US Techno-Economic Statecraft

My travels to South Korea as part of a “Next Generation Leaders” delegation, sponsored by the National Bureau of Asian Research (NBR) and the Korea Foundation, highlighted the robustness of the US-South Korean alliance and the challenges facing democracies in maintaining competitiveness against the People’s Republic of China’s (PRC) efforts to dominate emerging technologies.

Despite a shared commitment with the United States to countering the PRC, South Korea’s concerns regarding US policy and legislation such as the Inflation Reduction Act (IRA), CHIPS Act, and semiconductor export controls echoed similar apprehensions in Europe. The US-South Korean experience shows that unilateral technology policies can be a double-edged sword, capable of jolting allies into action but also risking diplomatic rifts. A more unified approach is needed to promote and protect allied tech sectors.

South Korea’s Crucial Position in the Global Technology Supply Chain

South Korea is a crucial node in the global semiconductor industry. The country’s Samsung and SK Hynix produce 73% of the global short-term memory market and 51% of the long-term memory market. South Korea also produces 37% of all processing chips at the 10 nanometer (nm) node and lower; Taiwan makes the rest. These chips are integral to advanced artificial intelligence programs and have been at the heart of US export controls toward the PRC.

However, South Korea’s chip industry is vulnerable because it is dependent on the PRC in two ways. First, the PRC is a major market for South Korean chips. Semiconductors account for 20% of South Korea’s exports, and 60% of those chip exports go to the PRC. These exports represent a significant revenue source. SK Hynix, for example, saw nearly 47% of its revenue from the PRC, a 2019 peak. This figure dropped to 27% last year, yet the PRC remains a crucial market.

Second, the PRC is a major site of production for South Korean chipmakers. SK Hynix produces 40% of its DRAM chips in Wuxi, and Samsung produces 40% of its NAND flash chips in Xi’an. Disruption to these facilities would have a ripple effect across the globe, as the Wuxi DRAM facility represents 13% of global DRAM production capacity, and the Xi’an facility represents 15% of global NAND flash production capacity.

South Korean policymakers have traditionally exercised caution in their approach to the PRC because it has used its economic leverage to punish South Korea before. Unsurprisingly, 80% of South Koreans have an unfavorable view of the PRC, but most see the United States as a strategic partner in countering Beijing’s technology ambitions. When polled, 91% of South Koreans surveyed said they would prefer to align with the United States over the PRC.

Yet US policies deployed to counter the PRC in recent years had initially unintended consequences for those South Korean industries also under threat from the PRC. Many South Korean observers criticized the IRA’s tax credits for US-sourced electric vehicles (EVs) as a “betrayal” that discriminated against South Korean auto companies in the US market. Similar complaints were leveled at restrictive requirements for CHIPS Act subsidies. There were also concerns that US export controls could shut down SK Hynix and Samsung’s PRC-based fabs. The United States provided those facilities waivers from controls, avoiding a major negative shock to the South Korean economy.

Two Lessons for Policymakers

The US-South Korean experience has two lessons for American policymakers as they formulate a doctrine for techno-economic statecraft:

Unilateral technology measures can be effective when they shape the geopolitical landscape and shake partners out of trepidation and complacency. Despite Seoul’s initial reservations, US-South Korean working groups are now collaborating on formulating export controls, coordinating a long-term exit strategy for South Korea’s PRC-based fabs, and discussing how to dovetail domestic industrial policies to friendshore critical industries. South Korea has invested billions in new battery, EV, and chip manufacturing plants in the United States.

Deeper coordination is needed, especially on industrial policy. Some allies initially perceived the IRA and CHIPS Act as protectionist trade measures that would negatively affect allied industries. Since then, South Korea, the EU, and Taiwan have all passed their own CHIPS acts. Yet competing industrial policies countering PRC coercion risk a subsidy race that can increase trade tensions, inefficiencies, and divide allies.

Deeper coordination among allies on industrial policies could preempt trade conflicts. One effective approach could be to provide a platform for direct dialogue among legislators responsible for crafting and funding these policies. Various forums exist for discussing trade and technology, but few prioritize direct communication among legislators from allied nations. More robust engagement with counterparts in allied countries could equip policymakers with a deeper understanding of the diplomatic implications involved in domestic industrial policies. This would be a key step toward an allied industrial strategy.