Beijing’s recent decision to prohibit use of semiconductors from the U.S. firm Micron in equipment for critical infrastructure has further drawn South Korea into the conflict between the United States and China over the development of China’s domestic semiconductor industry. However, it also has implications for how the United States and its allies deal with economic coercion.
The Micron dispute is rooted in a shift in U.S. policy to maintain, as National Security Advisor Jake Sullivan has noted, “as large of a lead as possible” over competitors in foundational technologies such as advanced logic and memory chips, which support the development of advanced artificial intelligence and other technologies that can advance the modernization of China’s military and its weapons of mass destruction. In practice, this has involved the use of export controls to limit China’s access to the most advanced semiconductors and the tools required to produce them, but also placed constraints on foreign firms in China.
Prior to the partial ban on Micron, China had not taken any specific actions to counter the increasing restrictions the United States and its allies have placed on the ability of Chinese firms to purchase the equipment necessary for the production of advanced semiconductors. While the Cyberspace Administration of China’s decision to prohibit the use of Micron chips in critical infrastructure was notionally put in place due to a finding that Micron’s chips “posed significant security risks to China’s critical information infrastructure supply chain,” the United States views the step as not based in fact and an effort by Beijing to engage in economic coercion.
It is unclear to what extent China’s decision will impact Micron. Micron’s sale of memory chips to China accounted for about 10 percent of the firm’s revenue in 2022, but Micron semiconductors are primarily used in smartphones and consumer electronics rather than equipment for critical infrastructure. The more significant risk for Micron is if the Cyberspace Administration of China’s decision is viewed more widely by Chinese firms as a signal to end the use of Micron’s chips.
The dispute over Micron has drawn in South Korea as the production of memory chips is largely dominated by Samsung, SK Hynix, and Micron. The three firms account for more than 90 percent of the global market share for DRAM chips and more than 60 percent for NAND chips. In light of Samsung and SK Hynix’s role in the memory segment, the Financial Times reported that prior to the ban the U.S. government asked the South Korean government to request that its firms not backfill any lost production.
Since the ban was announced, South Korea has signaled that it will not encourage its firms to fill the gap left by Micron’s exclusion. This is consistent with a prior statement that backfilling is a commercial decision. In the same regard, Seoul has not taken the proactive position of discouraging South Korean firms from seeking to profit from the ban on Micon.
The situation, however, is complex for South Korea and South Korean firms. Semiconductor manufacturing accounts for nearly 6 percent of South Korean GDP and is the country’s the largest export industry. Exports of memory chips alone accounted for 9 percent of all South Korean exports in 2022, with exports to China and Hong Kong accounting for a little over 70 percent of all memory chip exports.
South Korean semiconductor firms also have deep economic ties in China. Approximately half of all of the DRAM chips produced by SK Hynix are made at its plants in China, along with 30 percent of its production of NAND memory chips. Samsung produces 40 percent of its NAND chips in China.
While Samsung and SK Hynix are best placed to backfill any potential shortage from the Micron ban, the state of the industry also complicates their calculations. Revenues are down due to a downturn in the industry and excess capacity exists to manage any shortfall. Also, South Korean competitors Kioxia and Western Digital could provide supply as well, meaning any agreement to not backfill Micron requires broader coordination.
South Korea also faces potential economic coercion depending on the steps that it takes. While Samsung and SK Hynix are unlikely to face economic coercion due to their importance to the supply of memory chips in China, the history of China’s economic coercion after the deployment of the Terminal High-Altitude Area Defense (THAAD) system suggests that affiliated divisions of the firms or other South Korean economic interests could face informal retaliation should China seek to pressure South Korea on the issue.
After the deployment of THAAD, China instituted a range of informal measures to punish both the Lotte group, which previously owned the property on which the THAAD system was deployed, as well as other South Korean economic interests. Lotte’s supermarket division in China faced a rash of alleged fire safety violations that forced at least 87 of Lotte’s 99 stores in China to close and cost the firm an estimated $1.7 billion before it pulled out of China.
Beijing also informally sanctioned South Korean interests unrelated to THAAD. Group tours to South Korea were halted, costing the South Korean economy an estimated $24 billion. Beijing also cracked down on Korean cultural exports. Despite the Moon Jae-in administration reaching an agreement with China to normalize economic relations in 2017, China did not allow a new Korean online game or movie release until December 2021, and the first streaming of a new K-drama had to wait until January 2022. South Korea’s experience is that even after China agrees to end retaliation it lingers.
At the time, the Trump administration took no steps to support its South Korean ally against China’s economic coercion. While it is unlikely the Biden administration would follow the same course, it is less clear what measures the United States could take beyond offering rhetorical support.
Additionally, the Financial Times reporting on the U.S. request that Samsung and SK Hynix not backfill any losses suggested that the United States has leverage in the current situation due to the need to extend a waiver on U.S. export controls to maintain South Korea’s semiconductor facilities in China. However, using that leverage would essentially equate to the United States using economic coercion against its own ally to counter Chinese economic coercion.
From a strategic standpoint it is also unclear if encouraging Samsung and SK Hynix to not backfill any loss by Micron is the best long-term action. Prior to the United States implementing new export controls on semiconductor equipment, Apple was planning to source up to 40 percent of its NAND memory for iPhones from Chinese chip producer YMTC, who was also constructing a new fab to expand its production. Those export controls initially hindered YMTC’s ability to complete the new fab (domestic political pressure also played a role in Apple’s decision not to use YMTC). However, after turning to local tool makers YMTC expects that fab to come online in the second half of 2024. If the transition to local equipment manufacturers is successful, a decision not to backfill any lost supply from Micron could result in Chinese memory chip makers such as YMTC taking Micron’s market share rather than Samsung or SK Hynix.
The Chinese decision to partially ban Micron places South Korea in the worst of both worlds. If Samsung and SK Hynix do not backfill any losses from Micron, South Korea could face economic coercion from China. However, if South Korean firms do backfill losses it could damage relations with the United States.
This dilemma touches on one of the core challenges in dealing with economic coercion – how willing are states be to accept economic losses for allies and what compensation for those losses will allies provide? In this case, Washington and Seoul need to consider what is the best long-term plan to address the economic coercion against Micron, but also how to ensure the longer-term objectives for both countries semiconductor industries are enhanced rather than undermined.