Economic security needs to work both ways

By Troy Stangarone

In the lead up to Joe Biden's recent trip to South Korea, Washington and Seoul agreed to establish a dialogue channel on economic security. For much of the last few years, the United States has largely focused on how to improve its own economic security. But for the new initiative to succeed it will need to work both ways.

Economic security is a concept that stresses that economic issues are also national security issues. Trump's trade war with China was partially driven by the idea that the United States needed to restore its manufacturing base and prevent China from gaining dominance in critical technologies for national security reasons.

The underpinnings of economic security have also been reinforced by the supply chain disruptions during the pandemic. As the United States struggled to gain access to face masks and test kits early in the pandemic, first the Trump administration and now the Biden administration have sought to bring supply chains closer to the United States or more deeply enmesh them with allies to better insulate the U.S. economy against future economic disruptions or health crises.

Since the Biden administration completed its economic security driven initial supply chain review, South Korea has been viewed as an important partner to shore up U.S. production capacity in electric vehicle batteries and semiconductors.

The United States lacks the manufacturing capacity to produce the volume of semiconductors it needs. The same is true for the number of batteries necessary to meet the Biden administration's goal for half of all new passenger vehicles sold in the United States to be electric vehicles by 2030.

When South Korean firms like Samsung agree to invest in the development of new production facilities in the United States, such as its $17 billion plant in Taylor, Texas, it increases production capacity in the United States, shortening supply chains. The same is true for electric vehicle batteries. South Korean firms in joint ventures or on their own are constructing 11 of the 13 high-capacity battery plants being built in the United States between now and 2025.

While the U.S. benefits, South Korean firms do as well. After facing restrictions in China, for example, partnering with the United States provides a robust market for South Korean electric vehicle batteries and supports efforts by South Korea to becoming a major player in a rapidly shifting industry.

However, efforts to enhance economic security that largely focus on the United States are less likely to be successful than a true two-way collaboration. Semiconductors and electric vehicle batteries may be important components in U.S. products, but they also have supply chains that need to be secured.

Take semiconductors as an example. Semiconductors have been in short supply during the pandemic. That has slowed the production of products ranging from consumer electronics to automobiles. This is largely due to an increase in global demand for products that utilize semiconductors and an inability to quickly scale up production.

Building new capacity takes time, but securing access to the machinery, chemicals, and other inputs needed to produce semiconductors will be critical, and the challenge will not always be supply chains through countries less friendly to the United States.

In 2019, Japan put in place new export restrictions for fluorine polyimide, hydrogen fluoride, and photoresists ― chemicals critical to the production of semiconductors. In the end, Japan did not cut off South Korea's access to these key chemicals, but the pandemic has previewed the production disruptions that could have occurred if Tokyo had.

South Korea has taken steps to address this vulnerability in its supply chain, including investment from the U.S. chemical firm DuPont, but it still imports significant quantities of these chemicals from Japan. These concerns may decrease if relations between South Korea and Japan improve, but it is incumbent upon the United States to do more than it did in 2019 to make sure key inputs continue to flow should tensions rise again.

Supply chains for electric vehicle batteries are similarly challenging. South Korea imports more than 60 percent of its cobalt oxide ― a key input for battery cathodes ― from China which dominates both the mining and refining of cobalt. China plays a similar global role in many other key minerals.

In time the United States and South Korea may be able to develop alternative mining and processing facilities to meet a significant portion of materials they will need, but Japan's own experience in this field suggests it could take a decade or more.

After South Korea's experience with China over THAAD, the United States will need to be more prepared to assist with Chinese economic coercion as well.

For the United States to enhance its own economic security, it needs to work closely with South Korea to enhance Seoul's. At times, this may mean making it clear to other allies that certain actions are not in the interest of any of the parties, while in others it will require the United States to work with South Korea to develop alternative supply chains that reduce the dependence of both countries on a single supplier. Working together, the United States and South Korea can help to improve both countries' economic security, but only if they work to improve both countries supply chains.

Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.