Decoupling from China is not so easy for Japan and Korea
Decoupling from China is not so easy for Japan and Korea
WRITTEN BY DR CHANG-MIN LEE
7 March 2023
According to a White House report released on 8 June 2021, the core of the US economic security strategy under President Joe Biden consists of two main policies: revitalisation of domestic industries and strengthening cooperation with its allies. Embodied in the CHIPS and Science Act and the Inflation Reduction Act Biden signed into law in August 2022, the US economic security strategy aims to protect domestic industries and corporations. While it acknowledges that the US needs to strengthen domestic production capacities and upgrade its technological innovation ecosystem to compete with China, it also reflects the domestic political demand for supporting US industries and corporations. These legislative measures to counter China impose a heavy burden on US allies such as Japan and Korea. Both Tokyo and Seoul face unique circumstances in dealing with each other as well as with Beijing, which makes decoupling a complicated matter that each side deals with individually.
The CHIPS and Science Act aims to enhance the competitiveness of technology and production in the American semiconductor industry by investing in and cultivating the R&D workforce of American semiconductor manufacturing facilities. However, the act includes so-called guardrails that restrict investment in China, putting Korean chip makers like Samsung Electronics and SK Hynix, which operate large-scale semiconductor production facilities in China, in a difficult situation. The Inflation Reduction Act does not provide tax credits to electric vehicles produced outside of North America or those that contain batteries and core minerals supplied from countries of concern, such as China and Russia. Such regulations may have a significant impact on Korean and Japanese automakers that depend on Chinese batteries and core minerals.
Not a simple decoupling issue
The US-China rivalry and the COVID-19 pandemic have exposed the vulnerability of global supply chains, leading to accelerated decoupling from China among American corporations. Recently, the Reshoring Initiative estimated that foreign direct investment and bringing American companies back to the US would create 350,000 jobs. Near-shoring, where corporations build manufacturing bases in nearby countries such as Mexico, is another viable alternative. If a corporation has a production base in Mexico, it can transport its products more safely to the US market using trucks instead of crossing the ocean by ship.
However, not all US corporations have withdrawn from China. In June and July 2021, the American Chamber of Commerce in Shanghai surveyed over 300 American firms doing business in China. According to the survey, up to 60 per cent of those firms reported that they had increased their investment in China during the COVID-19 pandemic. Additionally, 72 per cent of US corporations producing goods in China said they had no plans to move their production facilities out of China in the next three years. This shows that decoupling from China is highly complex and varies on a per-item and per-industry basis.
Although both allies of the US, Japan and Korea are forced to compete with each other economically, which is exacerbated by persisting political problems between Tokyo and Seoul.
While the US has increased its level of scrutiny and sanctions against Beijing, it is generally agreed that complete decoupling of the US economy from China is neither possible nor desirable. This is why the Biden administration has shifted its policy toward China from decoupling to a policy known as “small yard, high fence”, which means narrowing the areas of scrutiny while increasing the strength of restrictions.
For Japan and Korea, the decoupling problem is not a simple choice between the US and China. Nevertheless, the reason why it is perceived as a binary choice is due to the newly emerging concept of “friend-shoring”. The Biden administration announced that it would select certain cutting-edge technology areas that are directly related to national defence, such as AI, electric vehicle batteries, semiconductors, and quantum technology, and would develop their supply chains only with US allies and friendly countries. This was designed to construct reliable supply chains while maintaining the technology gap between the US and China.
Japan’s relatively clear position
The Economic Security Promotion Act, which the Kishida government enacted in May 2021, is based on two main axes: the revival of domestic industries and the cooperation with allies. This strategy is similar to that of the United States. One example of a policy that combines these two axes is the semiconductor industry revival project, which aligns with the US goal of excluding China from the semiconductor supply chain through the chip alliance.
In December 2022, the American tech giant IBM announced its decision to supply its next-generation 2-nanometer semiconductor technology to a new Japanese semiconductor producer called Rapidus. While Rapidus is a new start-up founded in August 2022, its investors have been key players in the semiconductor industry since the 1980s when Japan established technological superiority and was the world’s leader in this sector. These investors include Toyota, Denso, Sony, NEC, NTT, Softbank, and Kioxia (formerly known as Toshiba), among others. In January 2023, Tokyo Electron, a high-tech semiconductor manufacturing equipment maker in Japan, announced its decision not to export advanced chip-making machinery to China, in compliance with demands from the US government. Additionally, Taiwan’s TSMC has expanded its investments in Japan, further solidifying the friend-shoring strategy in which the US, Japan, and Taiwan are building a joint front in the semiconductor industry.
However, it is important to note that not all Japanese firms doing business in China are participating in the decoupling trend. As of June 2022, over 12,700 Japanese firms still operate in China, although this number has decreased since the peak in 2012 when there were 14,300 firms. In the past three years, Japanese exports to China have increased, particularly in the electric and electronic fields. Considering this, the Japanese government is cautious about taking actions that may directly provoke China. For example, soon after taking office, Prime Minister Fumio Kishida announced that he would postpone enacting the Human Rights Violation Act targeting China’s suppression of human rights in Xinjiang and Hong Kong for the time being.
Korea’s relatively ambiguous position
While Japan has revealed a comparatively clear economic security strategy, Korea’s economic security strategy remains ambiguous. One reason for the vagueness of Seoul’s strategy is that the Korean economy has a greater degree of dependence on foreign trade, and a greater degree of dependence on China than Japan. Korean semiconductor manufacturers export 60 per cent of their products to China and import 60 per cent of their materials from China, making it difficult for them to depart from China and join the friend-shoring initiative with the US, Japan, and Taiwan. Moreover, in July 2019, Japan prohibited exports of semiconductor materials and core parts to Korea and has not lifted the measure yet. Korea is still not included in the list of credible friendly nations in Japan’s economic security strategy. Furthermore, Taiwan’s TSMC and Korea’s Samsung Electronics are competitors rather than cooperative partners, so it cannot be guaranteed that the chip alliance that the US, Japan, and Taiwan belong to aligns with Korean interests.
Recently, the Korean economic security strategy has become clearer. In June 2022, the National Security Council launched an economic security task force, which issued a report on Korea’s economic security in October. The report made it clear that strengthening cooperation with the US and Japan is no longer a matter of choice. Unlike the former liberal government that showed a pro-China tendency in its foreign policies, the new conservative government has aligned itself with the US and Japan in its strategy toward China. However, the dilemma facing the Korean semiconductor industry cannot be easily solved. With a comparatively smaller domestic market than Japan and greater dependence on China in its foreign trade, Korea needs a more complex and sophisticated decoupling strategy than Japan.
Decoupling from China is a complicated issue for Japan and Korea. Japanese and Korean companies face pressure from US economic policy and a political environment that favours decoupling from China. Although both allies of the US, Japan and Korea are forced to compete with each other economically, which is exacerbated by persisting political problems between Tokyo and Seoul. Both countries need to find their own strategies for reducing dependency on China without losing sight of their own domestic and international interests.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Dr Chang-min Lee is a Professor at Graduate School of International and Area Studies of Hankuk University of Foreign Studies, South Korea. Image credit: Wikimedia Commons/内閣官房内閣広報室.