China’s ban on Micron puts South Korea in the worst of both worlds – The Diplomat

Beijing’s recent decision to ban the use of US firm Micron’s semiconductors in critical infrastructure equipment has further embroiled South Korea in a US-China conflict over the development of China’s domestic semiconductor industry. However, it also affects how the United States and its allies deal with economic coercion.

The controversy surrounding Micron is rooted in a shift in U.S. support policy, National Security Adviser Jake Sullivan pointed out. “as much advantage as possible” over competitors in core technologies such as advanced logic and memory chips that support the development of advanced artificial intelligence and other technologies that can promote the modernization of China’s armed forces and his weapons of mass destruction. In practice, this included using export controls to restrict China’s access to the most advanced semiconductors and the tools needed to manufacture them, but also placing restrictions on foreign firms in China.

Before the partial ban on Mikron, China did not take any concrete action to counter the tightening restrictions. USA and its allies placed a bet on the ability of Chinese firms to procure the equipment needed to produce advanced semiconductors. While the China Cyberspace Administration decision to ban the use of Micron chips in critical infrastructure was allegedly put into action due to the conclusion that Micron chips “pose significant security risks to China’s critical information infrastructure supply chain.” Views of the United States move as not factual and an attempt by Beijing to tackle economic coercion.

It is unclear to what extent the Chinese decision will affect Micron. Micron’s sales of memory chips to China was about 10 percent the firm’s revenue in 2022, but Micron’s semiconductors are mostly used in smartphones and consumer electronics rather than critical infrastructure equipment. The most significant risk for Micron is that the China Cyberspace Authority’s decision will be seen more widely by Chinese firms as a signal to stop using Micron’s chips.

The Micron controversy has been pulled into South Korea as the memory chip industry is largely dominated by Samsung, SK Hynix and Micron. Three firms account for over 90 percent share of the global DRAM chip market and more than 60 percent for NAND chips. In light of the role of Samsung and SK Hynix in the memory segment, It is reported by the Financial Times. that prior to the ban, the US government had asked the South Korean government that its firms not make up for lost production.

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Since the announcement of the ban South Korea has signaled that he will not encourage his firms to fill the gap left by Micron’s expulsion. This is consistent with the previous statement that backfill is commercial solution. In the same regard, Seoul has not taken a proactive stance to dissuade South Korean firms from seeking to profit from the Micon ban.

The situation, however, is difficult for South Korea and South Korean firms. The production of semiconductors accounts for almost 6 percent South Korea’s GDP is the country’s largest export industry. Memory chip exports alone accounted for 9 percent of all South Korea’s exports in 2022, with exports to China and Hong Kong accounting for just over 70 percent of all memory chip exports.

South Korean semiconductor firms also have strong economic ties in China. Approximately half of all DRAM chips manufactured by SK Hynix are made in its factories in China, as well as 30% of NAND memory chips. manufactured by Samsung 40 percent of its NAND chips in China.

While Samsung and SK Hynix are best placed to make up for any potential shortfall due to the Micron ban, the state of the industry also complicates their calculations. Revenues are declining due to the downturn in the industry and there is excess capacity to deal with any shortfall. Also South Korean competitors Kioxia and Western Digital can supply It also means that any agreement not to fill in Micron requires broader coordination.

South Korea also faces potential economic coercion depending on the steps it takes. While Samsung and SK Hynix are unlikely to face economic coercion due to their importance in supplying memory chips to China, the history of China’s economic coercion following the deployment of the Terminal High Altitude Defense (THAAD) system suggests that the firm’s affiliates or other South Korean economic interests may face unofficial retaliation if China tries to pressure South Korea on the issue.

Following the deployment of THAAD, China introduced a series of informal measures to punish both the Lotte group, which previously owned the property on which the THAAD system was deployed, and other South Korean economic interests. Lotte’s supermarket division in China has faced a string of alleged fire safety violations that have forced at least 87 out of 99 Lotte stores in China to close and cost the firm approximately $1.7 billion before it was pulled out of China.

Beijing has also unofficially sanctioned South Korean interests not related to THAAD. Group tours to South Korea have been halted, hurting the South Korean economy valued at $24 billion. Beijing has also cracked down on the export of Korean culture. Even though the Moon Jae-in administration reached an agreement with China on normalize economic relations in 2017, China did not launch a new Korean online game P film release until December 2021 and the first broadcast of the new K-drama had to wait until January 2022. South Korea’s experience shows that even after China agrees to stop retaliation, it lingers.

At the time, the Trump administration took no steps to support its South Korean ally in the fight against China’s economic coercion. While it is unlikely that the Biden administration will follow the same course, it is less clear what action the United States might take beyond rhetorical support.

Besides, Financial Times report to a US request that Samsung and SK Hynix not make up any losses, suggested that the United States has leverage in the current situation due to the need to extend US export control exemptions to keep South Korean semiconductor manufacturing in China. However, using this leverage is essentially the same as using economic coercion by the United States against its ally to counter China’s economic coercion.

From a strategic perspective, it’s also unclear whether encouraging Samsung and SK Hynix not to make up for Micron’s losses is the best long-term move. Prior to the introduction by the United States of new export controls on semiconductor equipment, Apple planned to source up to 40 percent of its iPhone NAND memory from Chinese chip maker YMTC, which is also building a new plant to expand its operations. This export control initially interfered YMTC’s ability to complete a new factory (domestic political pressure also played a role in Apple’s decision not to use YMTC). However, after reaching out to local tool manufacturers, YMTC expects the factory to be up and running in the second half of 2024. If the move to local OEMs is successful, the decision not to make up for lost shipments from Micron could result in Chinese memory chip makers as YMTC takes Micron’s market share, not Samsung or SK Hynix’s.

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China’s decision to partially ban Micron puts South Korea in the worst position of both worlds. If Samsung and SK Hynix don’t make up for Micron’s losses, South Korea could face economic coercion from China. However, if South Korean firms make up the losses, it could damage relations with the United States.

This dilemma touches on one of the main problems associated with economic coercion: how willing are states to accept economic losses for the allies, and how much compensation for these losses will the allies provide? In this case, Washington and Seoul need to consider the best long-term plan to remove the economic pressure on Micron, and how to ensure that the long-term goals of the semiconductor industry in both countries are strengthened, not undermined.