The semiconductor industry is crucial not only for economic growth but also for leading future industries through innovation and technological development. Dominance in this sector is reflected through technological leadership, with leading nations at the forefront of scientific research and technological innovation, substantially contributing to global influence and economic competitiveness. Additionally, the semiconductor industry is vital for national security. Semiconductors are essential components in advanced weapons systems and are fundamental to nearly all modern military equipment and systems, including missiles, drones, radars, and communication devices. Consequently, controlling semiconductor supply chains and strategic technologies is critical for national security. Given the semiconductor industry’s importance, the battle for technological supremacy between the U.S. and China is central to their hegemonic rivalry. The United States has recognized that rapid advancements in China’s semiconductor technology could pose a significant risk to national security and has imposed various export controls, investment sanctions, and financial sanctions targeting China’s semiconductor industry. These U.S. measures impact not only China’s semiconductor industry but also significantly affect global semiconductor firms in Japan, the Netherlands, Taiwan, and South Korea, leading to substantial changes in the global semiconductor supply chain. However, China already plays a significant role as a global hub in semiconductor manufacturing and supply, and there is keen interest in the outcomes of the U.S. sanctions.

This study addresses three critical questions to understand the core of this issue and provides an in-depth analysis:

1. Can China overcome U.S. sanctions and continue to develop its semiconductor industry?

2. What impact will U.S. sanctions on China’s semiconductor industry have on the global semiconductor industry and the current global semiconductor supply chain?

3. How will the U.S.-China semiconductor hegemony competition affect Korean semiconductor industry and economy, and howshould we prepare policy-wise?

The first question explores whether China’s semiconductor industry can overcome U.S. sanctions and enhance its position in the global semiconductor supply chain. This study answers by analyzing the competitiveness of the global semiconductor industry, including China, from 2000 to 2022, and comparing changes in competitiveness over the past two decades. The analysis uses UN Comtrade data to derive various competitiveness indices and also examines semiconductor technology competitiveness by analyzing patent registrations in the semiconductor field over the past 20 years for major countries and the top 10 global semiconductor companies.

The analysis of memory semiconductors showed that South Korea had the highest RSCA (Revealed Symmetric Comparative Advantage) and TSI (Trade Specialization Index) values, indicating strong competitiveness. In contrast, China showed a comparative advantage in production and export for most of the analysis period, asindicated by positive RSCA values, but its TSI values were negative throughout, indicating difficulties in achieving trade surpluses and overall lower competitiveness in the memory semiconductor industry. In the system semiconductor competitiveness analysis, Taiwan showed the highest competitiveness, followed by South Korea, which showed positive RSCA and TSI values. China, on the other hand, showed low competitiveness in the system semiconductor sector, with RSCA and TSI values between -0.5 and 0.

In the semiconductor manufacturing equipment industry, Japan and the U.S. displayed high RSCA and TSI values, indicating strong competitiveness, while China showed very low competitiveness, with both indices close to -0.5 during the analysis period.

The technological competitiveness analysis based on patent registration data for memory semiconductors, system semiconductors, and semiconductor manufacturing equipment calculated indices such as RTA (Revealed Technological Advantage), TS (Technology Strength), CPP (Cites per Patent), and PII (Patent Impact Index). The results for China were similar to the trade data-based competitivenessanalysis, indicating a challenging situation for China to overcome U.S. sanctions in the short term. U.S. sanctions are expected to strictly limit China’s advanced chip production capabilities for the foreseeable future. Especially, the analysis based on semiconductor patent technology showed that global semiconductor manufacturers heavily rely on core technologies from the U.S., making it difficult for these companies to circumvent U.S. sanctions. However, the biggest problem the U.S. faces is securing active cooperation from global semiconductor companies and allies. There are significant conflicts between the U.S. and European countries over specific policies like the Inflation Reduction Act (IRA) and related subsidies. Global semiconductor companies are also likely to face substantial losses due to the sanctions, and there is considerable resistance to the U.S. administration’s policies, especially from EU countries, regarding how actively they will cooperate with U.S. policies against China. Additionally, active support from the Chinese government could greatly aid in enhancing the competitiveness of its semiconductor industry. Ironically, U.S. sanctions might actually accelerate innovation and self-reliance in China’s semiconductor sector, posing a short-term obstacle but unlikely to hinder the industry’s long-term development.

To answer the second question, this study analyzed the roles and positions of the countries in the global semiconductor supply chain through network analysis using trade data and firm-level supply-demand relations, focusing on global rankings and market shares in various semiconductor sectors. The analysis showed that China is already playing a significant role as a global hub in the semiconductor and semiconductor manufacturing equipment sectors, making it very difficult to quickly exclude or significantly reduce China’s role in the global semiconductor supply chain. In particular, the analysis of inter-firm cooperation and technology transfer relationships using Factset data showed that U.S. companies are major suppliers across the semiconductor industry, and applying a 0% de minimis rule would have a significant impact on the global semiconductor supply chain, making it impossible for most companies to evade these sanctions.

Despite these sanctions, it has been revealed that Chinese tech companies are importing and using advanced chips banned for export by the U.S. administration, and U.S. companies like NVIDIA are also circumventing sanctions by exporting modified semiconductor stargeted at the Chinese market. These incidents are occurring frequently, and the effectiveness of U.S. sanctions against China’s semiconductor industry depends on how much support the U.S. can secure from its allies. The U.S. is expected to transition to a multilateral export control system like the ‘Wassenaar Arrangement’ to fill the gaps in these sanctions.

Regarding the restructuring of the global semiconductor supply chain, it is expected to bifurcate due to U.S. sanctions. Advanced semiconductor production is likely to shift to a supply chain system centered around the U.S. and its allies, while the supply chain system for general-purpose semiconductors is expected to strengthen around China. In particular, no country can produce general-purpose semiconductors as cheaply and competitively as China, which is expected to increase its global market share in this sector. Additionally, developing countries like India, Vietnam, and Thailand import the most semiconductor manufacturing equipment from China, and the establishment of a supply chain system for low-cost general-purpose semiconductor production between China and these countries is also an issue worth watching.

In addressing the third question, the study examined the impact of U.S. semiconductor sanctions on the Korean semiconductor industry through three scenarios: the control of exports for semiconductor manufacturing equipment, the control of exports for AI semiconductors, and the imposition of increased tariffs on China.

The first scenario involves export control of semiconductor manufacturing equipment, where South Korea experienced a significant decline in semiconductor equipment exports compared to other countries following the U.S. semiconductor equipment sanctions in October 2022. China’s imports of semiconductor manufacturing equipment sharply decreased from October 2022, when U.S. sanctions began, to February 2023, but increased significantly from August 2023, eight months after the sanctions started. The U.S. initially saw a decrease in exports to China, but these later increased, and the Netherlands was not affected by the sanctions, with exports to China increasing. Even after controlling for variables such as the recent semiconductor business climate, South Korea’s imports of semiconductor manufacturing equipment have significantly decreased, and this trend does not appear to be following any particular trend. Also, South Korean manufacturing equipment is almost not included in the U.S. sanction items, while the U.S., the Netherlands, and Japan have many items essential in the semiconductor manufacturing process, which Chinese companies would likely prioritize purchasing with their current capital.

The second scenario involves AI semiconductor export control, which assumes the worst-case scenario affecting DRAM production. In this scenario, the supply of DRAM for AI semiconductors is assumed to be delivered by TSMC after final assembly through Taiwan’s export of HBM. This scenario also showed a significant negative impact on the Korean economy.

The third scenario involves an increase in U.S. tariffs on Chinese semiconductors under Section 301 of the U.S. Trade Act, which imposes high tariffs. In this scenario, exports of semiconductors produced in China to the U.S. decreased, while South Korea’s exports to the U.S. increased long-term due to trade diversion effects.

In conclusion, only the increase in U.S. tariffs on Chinese semiconductors is expected to have a positive impact on us due to trade diversion effects, while the export reduction of semiconductor manufacturing equipment and AI semiconductors such as HBM chips due to U.S. sanctions is expected to negatively affect us.

The U.S.-China semiconductor hegemony competition is already significantly limiting the business activities of our companies, and the negative impacts are likely to grow in the future. The U.S. is already responding to the potential impacts of this hegemony competition. The U.S. is relying on advanced semiconductor manufacturing by companies like Samsung and TSMC while fostering its domestic semiconductor companies like Intel and enhancing the backend chip post-processing capability through government subsidies to increase the resilience of the semiconductor supply chain.

In contrast, China, as previously discussed, is increasing its global market share centered on current legacy chips. In particular, the backend chip post-processing sector, which is technically less demanding and has a lower barrier to entry, could become an area where China can intentionally control the global supply chain based on its manufacturing capability and high market share. Therefore, such hegemonic disputes using this leverage are likely to continue between the U.S. and China, and the Korean government and companies need to prepare for this.

Korean companies have limitations in upgrading semiconductor manufacturing processes invested in China due to current U.S. sanctions on China. Therefore, in the medium to long term, advanced semiconductors are likely to be produced only in domestic or allied countries including the U.S. Ultimately, although production in China has been an optimal strategy for companies in terms of cost and market aspects, the U.S.-China hegemony competition makes it inevitable to relocate production bases for advanced semiconductor production. However, our current domestic semiconductor ecosystem is not more competitive than the ecosystem established in China.

This study recommends a series of policy measures aimed at bolstering the domestic semiconductor industry. These include strengthening the semiconductor manufacturing base and ecosystem, enhancing the added value of the industry, ensuring supply chain stability, and managing semiconductor operations in China effectively. It also suggests fortifying supply chain cooperation within the Korea-U.S.-Japan economic security alliance, controlling technology leaks, preventing talent outflow, and fostering a competitive innovation ecosystem. Additionally, the study advises managing supply chain risks, developing both short- and long-term production strategies, and promoting open trade policies and international cooperation.