What Korea should do in global chips war

By Sean O'Malley

Oh how the pendulum swings. In his 2007 book, "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism," the Korean-born economist Chang Ha-joon takes to task those who have forgotten or never learned their history. The main lesson of Chang's book is that industrial promotion policies and protectionist measures helped all current developed states achieve their level of development. The protection of technology and an uneven playing field allow states to get ahead and stay ahead of the competition. After years of multilateral, free market governance, the United States now seems to be embracing Chang's lesson.

Passed in the U.S. Congress last year, the CHIPS and Science Act (or CHIPS Act of 2022) enjoys a broad consensus of support among political elites. The act provides $38.22 billion in direct funding (i.e. subsidies) and a tax credit of up to 25 percent for advanced manufacturing investment by eligible companies in the semiconductor industry. Funding is available for advanced manufacturing facilities, research and development, workforce development and more.

To encourage third-party financing, the bill also allocates $6 billion to leverage up to $75 billion in loan guarantees. In addition, the bill provides up to $9 billion to establish a National Semiconductor Technology Center, a National Advanced Packaging Manufacturing Program, microelectronics research at the National Institute of Standards and Technology, and a Manufacturing USA Institute focused on semiconductor manufacturing.

This fairly comprehensive industrial promotion policy also contains numerous provisions that have raised the ire of free market champions. These provisions include "upside sharing" (i.e. profit-sharing) with the U.S. government for up to 75 percent of the subsidy awarded; sharing of research knowledge and personnel; daycare for workers' children and more. Complaints and opinions about the act abound here in South Korea.

"The legislation is anti-market" and "the sharing of excessive profit will be damaging to investors and shareholders," seem to be popular refrains. Though nearly every Korean analyst seems in favor of Korean companies receiving CHIPS subsidies, almost all seem vehemently opposed to upside sharing of profits and the sharing of research. Of course, subsidies themselves are anti-market, as they help distort prices while favoring certain companies or segments of the economy. Apparently, anti-market subsidies are fine as long as private companies, their shareholders and investors reap all of the profits.

However, what is the U.S. taxpayer if not an investor? If a company takes tax dollars as a subsidy, it should pay a dividend. The U.S. taxpayer is only asking for 75 percent of the subsidy in return for excess profits, which means the remaining 25 percent is free money, and there is no guarantee such excess profits will ever occur meaning no profits may be shared. How many banks lend money knowing their greatest return on investment will be 0.75? Meaning they lose a quarter of their invested monies.

"The act is discriminatory" is another popular sentiment, though it does not appear so. All companies face the same hurdles to receive direct funding, including the possibility of upside sharing. "Countries of concern," which includes China, cannot receive funding from the CHIPS Act, as these countries pose a national security concern to the United States. This is not discrimination in law because discriminatory trade behavior is allowed under World Trade Organization (WTO) rules for reasons of national security.

Unfortunately, years ago both Samsung Electronics and SK hynix took advantage of cheap Chinese labor and Chinese government incentives to establish factories there. Concerns arise because the CHIPS Act requires that companies receiving subsidies do not invest for advanced semiconductor manufacturing in "countries of concern" for 10 years. Therefore, these South Korean companies will not be able to update their facilities in China if they receive subsidies. This is not discrimination as much as the "China risk" coming home to roost.

It is important to remember that companies do not need to take these subsidies. Samsung Electronics is receiving hefty tax breaks, cheap land and other incentives to build a facility in Texas. SK hynix will receive similar local support in the United States wherever it invests.

Make no mistake, the chip wars are here; the battlefields are global and the generals will be found in government policy offices and corporate boardrooms in the United States, China, Japan, Taiwan, South Korea, the Netherlands and other states that wish to compete. The United States has fired a significant salvo in what will be a drawn-out fight. Crying foul about the United States not funding Korean companies with blank checks won't help much.

The U.S. Commerce Department is not holding back Korean companies; poor leadership from South Korean political elites is. South Korea's industrial promotion policies, so effective under the strong leadership of President Park Chung-hee, are now a shell of their former glory. Burdened by overregulation, militant unions, partisan political bickering and a "not in my backyard" (NIMBY) attitude among South Koreans, it is difficult for advanced manufacturing investment to flourish.

What South Korea needs is to pass another revision of the Restriction of Special Taxation Act, dubbed here the K-chips act. The current version makes little sense in terms of spurring innovation through tax breaks, offering a mere 8 percent tax credit for large corporations. Although semiconductor investment has been championed by the former Moon administration and the current Yoon administration, the Democratic Party of Korea (DPK) and its leader Lee Jae-myung believe support for the semiconductor industry is a handout for the wealthy. Therefore, the majority party in the legislature presents a significant obstacle to investment and political consensus.

South Korea is a top ten economy and a leader in the semiconductor industry. Rather than waste time grumbling about an unfair playing field in this war, it should start building its own arsenal. It can start by supporting its own industrial players. It shouldn't expect any other country to do that.

The Biden administration has found consensus in the U.S. Congress: America must keep and expand its competitive, and technological edge against China. The American public is on board as well. The chip wars have begun. The historical pendulum has swung. Protectionism is back in vogue.

Sean O'Malley (seanmo@dongseo.ac.kr) is a tenured professor of international studies at Dongseo University, where he teaches classes on free trade, regionalism and international relations.