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Allies need to closely discuss China's pressure
By Troy Stangarone
The decision by the Cyberspace Administration of China to ban Micron Technology's semiconductors in Chinese infrastructure has put South Korea in the middle of the dispute between Washington and Beijing over the future of China's semiconductor industry. While there are immediate issues for South Korea and the United States to consider, the dispute highlights the need for South Korea and the United States to engage in deeper discussions in the medium-to-long term on how to handle economic coercion by China.
The current dispute stems from efforts by the U.S. to restrict China's access to the most advanced semiconductors for reasons of national security. The development of artificial intelligence is enhanced by the increased computing power advanced semiconductors provide and is expected to have a significant impact on how wars are fought in the future. But advanced semiconductors are also critical for supercomputers to improve the flight accuracy of ballistic missiles and to power advanced fighter jets and missile defense systems.
With China aiming to surpass the U.S. in these technologies the development of China's semiconductor industry and its access to advanced chips has become a key area of concern for U.S. national security and its ability to meet military commitments in the Indo-Pacific.
Depending on how China's ban is interpreted by domestic companies, the effect could be limited. Micron primarily supplies semiconductors to firms producing smartphones and computers rather than manufacturers of equipment for critical infrastructure. However, if Chinese manufacturers of consumer electronics interpret China's partial ban as a signal that they too should cut ties with Micron, it could impact 10 percent of the firm's business.
South Korea has been drawn into the dispute due to its leading role in the semiconductor industry, specifically, the memory segment where Micron, SK hynix, and Samsung are the three dominant manufacturers. Together, the three companies account for more than 90 percent of the global market share of DRAM. They also produce more than 60 percent of the world's NAND memory chips.
Because Samsung and SK hynix are the semiconductor manufacturers best placed to backfill any Chinese losses from the ban on Micron, the U.S. is reported, by the Financial Times, to have requested that the Yoon administration ask the two firms not to make up any lost supply. South Korea has suggested that this is a commercial decision for the two firms, but that it will not encourage them to take Micron's market share.
While there are immediate issues related to whether Samsung or SK hynix will backfill any losses from Micron's ban, the situation underscores some of the key issues the U.S. and South Korea need to work through related to economic coercion. The first is whether it is appropriate for governments to request that their firms not pursue market opportunities when a firm from an allied country is the target of economic coercion. In the Micron case, due to the national security implications, the request seems appropriate.
Though, there needs to be certainty that if the situation is reversed and Samsung or SK hynix faced a ban, the U.S. government would be willing to speak to Micron about why it would not be in the interests of national security to backfill, even if both the U.S. and Korean government agree that it should ultimately be a commercial decision.
Related to when governments ask for assistance during economic coercion is how much economic retaliation allies will accept to support their ally. In cases with clear ties to national security, that may be an acceptable cost. However, as disputes move into lower-level policy issues, the threshold for accepting losses in solidarity will decline. Other tools or means of support will need to be considered.
There is also a need to discuss what steps are appropriate when economic coercion takes place due to a policy decision, such as the deployment of THAAD that leads to the targeting of unrelated commercial products. The Trump administration did not support Korea during China's economic retaliation against Korea after the THAAD deployment, but with China targeting Korean cultural content and tourism, there were no substitutable goods for the U.S. or other allies to withhold. In addition to public statements of support and condemnation of economic coercion, a recent study by the Center for Strategic and International Studies (CSIS) suggests that Australia's experience during the pandemic of using the WTO dispute settlement mechanism can be an effective tool in convincing China to back down.
These are not the only issues related to economic coercion that the U.S. and South Korea should discuss, but the Micron case highlights the need for more sustained discussions on these issues. There is little reason to believe China's use of economic coercion will subside in the future.
Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.
