Stronger chip alliance needed to bolster Korea-US ties

Experts urge US gov't to mend IRA to offer Korean firms more benefits

By Baek Byung-yeul

South Korea should deepen its security alliance with the United States by intensifying economic cooperation, as Washington seeks to expand investments in its manufacturing industry to strengthen economic supremacy over China, according to scholars and analysts from South Korea and the U.S.

This year marks the 70th anniversary of the South Korea-U.S. alliance. The two nations signed the Mutual Defense Treaty on Oct. 1, 1953.

Over the past seven decades, the U.S. has shielded South Korea from North Korea, which has helped the South achieve extraordinary growth in many sectors, ranging from heavy industries including carmaking, steel and shipbuilding to high-tech and emerging industries such as semiconductors and electric vehicle (EV) batteries, the experts said.

They added the remarkable growth of South Korea's industries is also of great help to the U.S. as it tries to stand stronger against China.

Over the past few years, Washington has launched countermeasures against Beijing such as imposing sanctions on Chinese tech firm Huawei, crafting the CHIPS and Science Act to encourage chip-making businesses to reshore their facilities and passing the Inflation Reduction Act (IRA) to contain the Chinese-dominated EV battery industry.

However, the power struggle between the world's top two economies also inflicted unintended consequences on South Korean companies that have a high proportion of semiconductor and battery businesses in China.

Kim Dae-jong, a professor of business administration at Sejong University, said the South Korean government and companies should try to deepen cooperation with the U.S. and reduce their high dependence on China.

"Ensuring national security is a value that should be considered a top priority in running a country," he said.

"Our economy is heavily dependent on international trade and the Chinese market, including Hong Kong, accounted for nearly 30 percent of the nation's total trade in 2022. Given that China accounts for around 13 percent of the world economy, this can be interpreted that we are overly dependent on China at two or three times the average."

He added, "Whether you agree or not, the U.S. has contributed the most to South Korea's economic development. South Korea's defense budget amounts to around 2 percent of GDP while North Korea spends about 26 percent of its GDP as of 2022. With the U.S. sharing a significant portion of our defense, we have been able to devote more resources to economic development instead of defense."

American experts also agreed that South Korea's importance is increasing in terms of containing China's rise, as the South has shown dominance in core businesses of the Fourth Industrial Revolution, such as memory chips.

South Korea's growing influence in high-tech industries suggests that its U.S. relationship has evolved to the extent that Seoul is now one of its critical partners in terms of maintaining its economic supremacy over China.

The U.S. especially recognized the importance of having manufacturing capability within its territory ― or at least within the ranks of its trusted allies ― after experiencing the COVID-19-led global supply disruptions that hampered its pivotal industries such as the automotive sector.

"Given the major global shifts underway in energy and tech supply chains, the U.S. and South Korea have many ways to cooperate on these issues," Chris Miller, an associate professor of International History at Tuffs University and author of the book "Chip War: The Fight for the World's Most Critical Technology," told The Korea Times. "Semiconductors are a major area of focus, with South Korean firms investing in the U.S. and American firms seeing South Korean companies as valuable suppliers that are less reliant on China-Taiwan risk. I expect more joint trade and investment in chip-related technology over the coming years."

Jim Handy, general director at Silicon Valley-based semiconductor market research company Objective Analysis, also said South Korea's tech industry, especially the chip business, has played and will continue to play a pivotal role in Washington's operations to contain Beijing.

"What is most important to the U.S. government is that South Korean semiconductor manufacturers must not be defeated by new Chinese competitors. South Korean manufacturers are in an incredibly powerful position, and the U.S. doesn't want for that power to move to China, especially since there are several important differences of opinion between the U.S. and China on intellectual property, government's role in industry, China's relationship with Taiwan and other broader issues like the South China Sea and human rights," Handy said.

From left, Sejong University professor of business administration Kim Dae-jong, Objective Analysis General Director Jim Handy, American Enterprise Institute senior fellow Derek Scissors, Tuffs University associate professor of international history Chris Miller and Brookings senior fellow Sarah Kreps.

IRA needs to be amended in favor of Korean companies

In order to contain China's growing influence on the global economy, the U.S. has actively been urging global firms to invest more on its soil.

Among Korean companies, Samsung Electronics is executing its long-term plan to build 11 chip-making factories by investing around 250 trillion won ($203 billion) in Texas over the next 20 years.

Hyundai Motor Group also broke ground for its EV plant in Georgia last October. Investing $5.54 billion, the automotive giant will produce EVs for American consumers and hire American workers as part of its efforts to meet U.S. President Joe Biden's plan to revitalize American manufacturing. Three South Korean EV battery makers ― LG Energy Solution, Samsung SDI and SK On ― are also operating battery manufacturing plants or planning to add new ones to meet the fast-growing popularity of EVs in the U.S.

While South Korean companies are increasing their investment in the U.S., experts said the IRA was promoted too hastily and caused negative effects for Korean car and battery makers.

The new law offer a government tax incentive of up to $7,500 to new EV buyers, but only for cars assembled in North America. The law severely affects Hyundai as its EVs are currently manufactured in South Korea. The IRA also requires EVs qualifying for the tax credit to use critical battery materials sourced from the U.S. or countries that have free trade agreements with the U.S., and for the battery components to be manufactured or assembled in North America.

They added the law needs to be amended promptly so that Korean companies that are trying to meet the Biden administration's demands can have more time to minimize the impact.

"In terms of energy and batteries, the U.S. Congress made a mistake in the way the IRA was written, but the Biden administration is looking to change the IRA implementation so that it doesn't unfairly exclude companies from South Korea, Europe and other countries. I expect substantial increases in cooperation in the energy and battery sphere over the coming years," Miller said.

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On the other hand, allies like South Korea should be assured that they are sharing the same goal with the U.S., which is reducing China's influence over global trade.

"At the most general level, the U.S. should make clear that its goal is not to cut off friends such as the ROK. However, the U.S. does have a goal of reducing dependence on China and expects friends to accept that goal. Right now, important aspects of the green energy industry are dominated by China and actions must be taken to correct that. The U.S. should make changes in the Inflation Reduction Act to avoid harming South Korean companies, as long as they don't also help China maintain its position," Derek Scissors, senior fellow at American Enterprise Institute, told The Korea Times.

Sarah Kreps, senior fellow of Brookings Institution and director of the Cornell Tech Policy Institute at Cornell University, also told the newspaper, "The United States has unfortunately taken some measures that seem to signal a strategy of 'America first,' sometimes in ways that have a second-order effect of undermining the allies that the U.S. needs to stand stronger against China."

She pointed out that the Chips Plus Act provides billions of dollars in subsidies to reshore semiconductor manufacturers, which have become more concentrated in places like Taiwan and South Korea in recent years. She also stressed that the by offering tax rebates only for electric vehicles manufactured in North America, the IRA excludes those made in Europe, Japan and South Korea.

"Both of these are essentially backdoor forms of protectionism," she said. "It turned out that manufacturing chips or EVs in the U.S. was not terribly cost-effective. Policies that incentivize bringing those industries back to American shores will have the effect of increasing prices at a time when we're already facing higher levels of inflation. Those policies also ignore the importance of having strong allies whether in terms of trade or confronting hostile countries in the region."