Trade dispute on hold! After being "stuck in the neck" of Japan in the chip field for 4 years, how can South Korea save itself?

As the South Korean government's third-party compensation scheme aimed at resolving claims made against Japan by Japanese forced laborers during World War II made public, the trade standoff between Japan and South Korea over the issue also eased.

On March 16, South Korea's Ministry of Trade, Industry and Energy announced to the press corps that during a policy dialogue with Japan's Ministry of Economy, Trade and Industry, South Korea and Japan agreed on export controls of semiconductor materials between the two countries since 2019. According to the agreement reached between the two sides, Japan began to lift export restrictions on three materials for South Korea's chip industry, and South Korea withdrew its WTO complaint over export controls. At the same time, the two sides reached close communication on the re-inclusion of each other's countries in the "white list" of export control, and strived to restore the original order as soon as possible.

This news also means that the dispute between Japan and South Korea in the field of trade has stalled.

These three materials are important for the Korean economy

In October 2018, the Supreme Court of South Korea ordered Japanese companies involved in the case to compensate victims of forced recruitment during World War II. Nearly a year later, the Japanese government took countermeasures in July 2019 to restrict the export of three key semiconductor materials, high-purity hydrogen fluoride, fluoropolyimide and photoresist, to South Korea, and in August of the same year, it also kicked South Korea from the whitelist of countries subject to simplified export procedures. South Korea took Japan's export restrictions to the World Trade Organization (WTO) in September 2019.

The three semiconductor raw materials banned from Japan to South Korea, namely fluorinated polyimide, photoresist, and hydrogen fluoride, are mainly used in smartphone panels and LCD screens of TVs, and photoresists are also the core materials of semiconductor products. According to data from the Korea Trade Association, semiconductor industry exports account for an average of 25% of South Korea's total exports; Of the three raw materials needed by South Korea, 91.9% of fluorinated polyimide, 43.9% of photoresist and 93.7% of hydrogen fluoride are imported from Japan. Among them, the photoresist with low dependence, in fact, a large number of photoresists imported from Belgium by South Korea were produced by the Belgian subsidiary of the Japanese company JSR, so the dependence of Korean photoresist on Japanese companies at that time was actually more than 80%. Therefore, Japan's move is seen as "choking" the throat of the South Korean economy.

Li Min, assistant researcher at the Asia-Pacific Institute of the China Institute of International Studies, told First Finance and Economics that in the global industrial chain division of labor, South Korea is in the production and processing link, and Japan is in the link of providing key raw materials. Previously, Japan's export control of key materials in the semiconductor field has had an impact on the global semiconductor industry, which the international community, including the United States, does not want to see. ”

Korean enterprises are busy "self-help"

South Korea's economy has long been highly dependent on Japan, and since the normalization of relations between the two countries in 1965, it has been in a state of trade deficit, and in 2018, South Korea's deficit with Japan was $24 billion, which is the largest deficit of all South Korean trade relations. According to the Korea Trade Association (KITA), the largest source of South Korea's trade deficit with Japan is high-tech products, especially semiconductors and chip manufacturing equipment, which account for one-third of the deficit.

However, in the three years since Japan has imposed sanctions, it is not that Japanese manufacturers of the above three key materials cannot export to South Korea, but each batch of the above materials must pass the export examination of the Japanese Ministry of Economy, Trade and Industry, and the review time was once delayed to three months. Before the trade conflict, Japanese manufacturers only needed to pass one review before they could freely export to South Korea.

Because high-purity hydrogen fluoride is highly corrosive, the storage time is very short, and the inventory of upstream semiconductor materials by Korean companies is generally 1-2 months, so the export restrictions of Japanese semiconductor materials at that time had a great impact on the Korean semiconductor industry.

In order to get rid of the "stuck neck" dilemma, the South Korean government increased its support for semiconductor raw materials, components and equipment suppliers in 2019, and launched an import substitution project in November of the same year, trying to reduce dependence on Japan in these fields through a two-step strategy of supplier diversification and localization.

In terms of suppliers, Korean companies have increased procurement from China, Europe and the United States to replace Japanese manufacturers. Data from 2020 show that South Korea's imports of semiconductor materials from Japan account for 38.5% of total imports, while the second largest source of semiconductor material imports is China (20.5%), and the rest are the United States (11.3%).

In terms of localization, South Korea's photoresist industry has achieved a breakthrough of zero. According to Korean media reports, South Korea's Dongjin Semiconductor began to develop EUV photoresist after the trade war and passed the reliability certification of Samsung Electronics in 2021. After that, it took about one year to put it into the application of the production line. This news was regarded by Korean media as an important moment for the Korean semiconductor industry chain to achieve independence.

In the field of hydrogen fluoride, the independent research and development progress of Korean companies is also very fast. By the end of last year, three Korean companies, including SK Materials, had successfully developed hydrogen fluoride, and some of its products have been used by semiconductor manufacturers for mass production.

According to data from the Ministry of Trade, Industry and Energy, South Korea has seen a 66% decline in hydrogen fluoride imports over the past three years, from $36.3 million in 2019 to about $12.5 million in 2022.

However, due to the wide range of content and subdivisions of the above materials, especially in the field of photoresists, it is obvious that Korean companies cannot achieve "complete" replacement.

On March 15, just before Yoon's visit, the South Korean government proposed to create the world's largest semiconductor cluster in the metropolitan area, a blueprint that includes the creation of a semiconductor manufacturing center that can house giant manufacturing plants, design companies and material suppliers, aiming to strengthen the country's domestic supply chain.

The plan also requires the participation of large South Korean companies such as Samsung Electronics. By 2026, South Korea will invest 550 trillion won ($422 billion) in areas including chips, batteries, robotics, electric vehicles and biotechnology.

South Korean tech giant Samsung Electronics later confirmed that it would invest nearly 300 trillion won ($230 billion) by 2042 to develop the "world's largest semiconductor manufacturing base" in a South Korean government plan to boost the country's chip industry.

How to stir up the global market?

Now, with the trade war between Japan and South Korea suspended, how will their joint efforts stir the global chip market?

A previous report by the National Federation of Economists (FKI) titled "The Current Status and Future Tasks of South Korea, the United States, and Japan's Import Dependence on China" shows that South Korea is more dependent on China in semi-finished products and material parts than Japan and the United States. According to the report, about 29.3% of South Korea's raw material parts imports in 2020 came from China, compared with 28.9% in Japan and 12.9% in the United States.

As far as intermediate goods are concerned, the FKI report believes that South Korea's dependence on Chinese imports in 2019 is significantly higher than that of Japan and the United States, well above the international average of 10.4%, "The reason why South Korea and Japan rely on China for the import of semi-finished products and raw material parts is because China, Japan and South Korea have formed an interconnected economic group based on trade in intermediate goods." ”

Li Min told First Finance and Economics that South Korea's dependence on China is more due to price factors, and its dependence on Japan is due to technical irreplaceability, "South Korea's improvement of relations with Japan, there is no lack of economic and technical considerations behind it." If Japan's exports of key materials in the semiconductor sector to South Korea return to pre-trade war levels, it will be helpful to the entire semiconductor industry chain in South Korea. ”

It is worth noting that the US Department of Commerce officially launched the $53 billion chip bill in early March. The bill includes support policies such as subsidies for the chip industry and a 25% investment tax credit for semiconductor and equipment manufacturing, but the most concerned provisions also include exclusive policies for China's chip industry.

As the two major allies of the United States in Asia, Li Min believes that in combination with the US chip bill and the "Chip 4" alliance, "although the subsidies provided by the United States are not small, Korean companies cannot cooperate with China within 10 years according to the constraints of the United States, and the opportunity cost is too large." South Korea needs to find a balance between cooperation between the United States, Japan, and South Korea and China, Japan and South Korea. ”

In the second half of last year, relevant South Korean government officials and corporate representatives have repeatedly gone to the United States to try to coordinate the relevant positions of chip cooperation. The latest news from the US White House on the 7th shows that South Korean President Yoon Seok-yue will pay a state visit to the United States on April 26.