China-Korea semiconductor trade starts to crack under US pressure

The strong semiconductor trade flows between China and South Korea are coming under pressure as Washington seeks to isolate Beijing from global tech supply chains, but the US policy will inflict pain on Korea’s chip giants, according to analysts.

Although Seoul has yet to join the Washington-led Chip 4 alliance, an initiative with Tokyo and Taipei to undermine China’s role in chip supply chains, and Korea has not followed Japan and the Netherlands in restricting exports of chip making technology to China, the once-robust memory chip trade between the two Asian neighbours is showing signs of cracking.

“If the US imposes sanctions on Korean companies [for doing business in China] … it will be difficult to go against them,” said Kim Yang-paeng, a senior researcher with the Korea Institute for Industrial Economics and Trade. That is because US core technology is used by all chip makers, including those in South Korea.

China’s drive for chip self-sufficiency has reduced imports for some Korean products, contributing to Korea’s trade deficit. In 2022, China’s imports of integrated circuits declined for the first time in 18 years, with the 15.3 per cent slump marking a sharp contrast to double digit growth in previous years, according to China customs data.

While Korea’s total exports rose 6.1 per cent in 2022 to reach an all-time high, exports to China – its largest trading partner – fell 4.4 per cent, according to Korean customs data.

However, Korean chip makers like Samsung Electronics and SK Hynix are finding it difficult to expand production in China because Washington has cut China’s access to advanced chip manufacturing equipment.

These early signs of decoupling could become more prominent in 2023 as Seoul has little choice but to align its chip trade and investment policies with Washington, given that the US is Korea’s main military ally. After the Biden administration tightened export controls on advanced chip design and manufacturing technologies to China last October, Korean chip makers had to apply for a one-year grace period to keep importing the necessary equipment for their existing facilities in mainland China.

In another step that will tighten the noose on China’s access to advanced chip making technologies, the Netherlands and Japan reportedly agreed with the US to restrict exports of certain equipment to China, including some deep ultraviolet (DUV) lithography systems made by ASML, the Dutch equipment maker with a monopoly on the high-end extreme ultraviolet (EUV) machines required to make chips at the 5-nanometre node.

Kang Jun-young, a professor of Chinese studies at Hankuk University of Foreign Studies, said Washington’s semiconductor export controls will damage the China businesses of South Korean chip makers like Samsung and SK Hynix by reducing output at their China plants. South China Morning Post