The author is a visiting professor of energy resource engineering at Inha University.
Global supply chains are roiled by multiple disruptions and geopolitical influences from the entrenched Russia-Ukraine war and Israel-Hamas conflict amid the ongoing U.S.-China trade war and escalating tensions between Taiwan and China. Exploring a new paradigm in supply chains to ensure greater security has become imperative due to the growing challenges from military conflicts, changes in the trade environment, and threats from pandemic and climate-related disasters.
The U.S. Department of Commerce last month announced it would look into American companies’ sourcing of general-purpose semiconductors widely used in consumer products, cars, appliances, aerospace, and defence industry in January The probe primarily targets China, which has come to dominate the supply of legacy chips that can circumvent the U.S. export curbs on equipment for high-performance chips. U.S. chip policy is double-edged, aiming to strengthen domestic sourcing while containing China’s threat to its national security through chip leverage.
China immediately launched a counteroffensive. Beijing last month included China’s technology to mine, extract and refine rare earth elements in its list of export bans. Rare earths are crucial in the production of smartphones, electric vehicles, wind turbines, and other high-tech products.
China accounts for 70 per cent of the world’s main production of rare earths. Sixty-eight per cent of global rare earths mining and 94 per cent of refining them take place in China. When including the refining technology, which was included in the export control, China dominates 90 per cent of rare mineral supplies. China took action as a counterattack against the U.S. export curbs on chips and other cutting-edge technologies.
The U.S. has become nervous about a smaller-than-expected impact on China from its restrictions on high-end chip technology and equipment together with South Korea, Taiwan, Japan, and the Netherlands. Chinese chipmakers backed by generous subsidies from the government instead have been targeting the mass-market sector, which accounts for 75 per cent of the global chip revenue with their older-generation technology and fab facility.
Washington will likely beckon Korean companies to join its second attack on China, targeting the lower-end chip category. Korean chipmakers dominate the memory chip market, but producers of consumer electronics, smartphones, and motor vehicles cannot sustain price competitiveness if they don’t use Chinese chips.
Korean automakers received a blow from the U.S. Inflation Reduction Act aimed at restricting government subsidies to electric vehicles assembled in the U.S. Korean industries can receive another upset if China restricts Korea-bound exports of materials and parts for wind power generation in retaliation for Seoul’s backing of U.S.-led sanctions on China.
Of the five awardees who recently won the Ministry of Trade, Industry and Energy’s procurement for wind power facilities, two are mulling use of Chinese turbines. In wind power, blades and turbines are the crucial components. Chinese supplies are 30 to 40 per cent cheaper than European products. Rare earth elements are essential in powering turbine generators. If China slams curbs on rare earths, Korea’s wind power industry will inevitably be affected.
The government last year announced a special decree to ensure stability in raw materials and supply chain. It listed 185 items — including rare gases like neon, xenon and krypton, and graphite, rare earths, and urea — as targets for concentrated localization to bring their import share to under 50 percent to prepare for Chinese weaponization of raw materials.
Korea still relies more than half of its key imports on China, largely because of their low prices. As a result, Korea is vulnerable to the whims of China to face supply shocks like the urea disruption.
The government must diversify supply chains based on several standards, including price competitiveness, technology level, and rarity of key import items. Of them, price competitiveness is essential. Supply chain diversification would have little effect if an alternative supplier charges much higher than China.
Korea also must activate its diplomatic channels to deal with China, which holds the say in key minerals. Japan and Australia try to maintain amicable relations with China even though they don’t like China. They seek diplomatic relations in order to protect their national interests. Korea must keep close tabs on international developments to enlarge its national interests.
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