Tuesday, May 30, 2023

South Korea ponders the high cost of being America’s friend

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Last time it was the Netherlands and Japan, now it’s South Korea and soon it’s going to be the whole of the G7 rich countries. Being a US ally at a time when geopolitics is leaning heavily on trade policy certainly keeps you on your toes. It’s also quite galling when Washington expects you to take economic hits for geopolitical gains when it’s not always willing to do the same itself.

This week the Financial Times revealed that the US is pushing Korea’s semiconductor manufacturers (principally Samsung and SK Hynix) not to fill any gap in supply to China if the US chips company Micron is excluded from Chinese markets on national security grounds.

Because of their military uses — and more generally to limit China’s technological advance — semiconductors are one of the main pressure points for the US’s campaign on security and trade. This year Washington succeeded in pressing the Netherlands and Japan into agreeing tougher export controls on chip exports to China.

Washington’s implicit threat is to allow the expiry of waivers granted to Korean companies after the US last October imposed broad controls on trade in chips and chip equipment with China. The US can, in theory, use its extraterritorial sanctioning powers moderated by loopholes to fine-tune coercion over not just adversaries but allies.

The Korean president, Yoon Suk Yeol, visits the White House this week. He is relatively hawkish on China but also has Korea’s commercial and wider diplomatic interests to consider.

China is now by far Korea’s biggest trading partner, with the US second. Korea established a lucrative position providing higher-value components as well as being a consumer market during the construction of the “Factory Asia” electronics supply network during the 1990s and 2000s. That was concomitant with the rise of China as a globally important trading nation. The effective decoupling of the US and China will need support from other Asia-Pacific countries.

US consumer goods companies and ultimately the American market still remain the end point for many Asia-Pacific supply chains, raising the question of how credible the threat really is to disrupt China’s semiconductor sector. DRam chips made in China, for example, find their way via the Taiwanese company Foxconn into Apple iPhones sold in the US.

Assuming Seoul believes it has a genuine choice, Korea must decide how much it is prepared to override its commercial interests in favour of maintaining relations with the US, its longstanding military and foreign policy ally. And here it might help if the US threw its supposed allies the odd symbolic bone.

The Korean carmakers Hyundai and Kia are among foreign companies struggling to join the golden circle eligible for US tax credits for electric vehicles under Joe Biden’s Inflation Reduction Act. Despite Hyundai building a car plant in the state of Georgia, they have so far failed. Although less high-profile than the EV subsidies, the rest of the IRA will cause more distortions in global trade. For Biden, jobs at home have trumped alliances abroad.

Korea might also suspect the US warning has more to do with profits at Micron than national security. The Netherlands was irritated when ASML, its world-leading chip machine manufacturing company, was restricted from exporting kit to China in 2019 only to find American companies filling the gap with semiconductors they had made themselves.

As Hosuk Lee-Makiyama of the Brussels-based think-tank ECIPE puts it, “After the IRA, the US has no commercial allies. They compartmentalise business and politics and then wonder why the rest of the world does the same.”

It is becoming increasingly clear that for reasons of commerce, diplomatic independence and simple practicality, the US’s designated circle of allies is not following Washington blindly into whatever confrontational and coercive policy it chooses against China — or even against Russia, an economically and politically clearer-cut target.

The FT has reported that the US, concerned about loopholes in its sanctions on Moscow, has proposed a total ban on exports to Russia be adopted by the G7, but the rest of the group is resisting. The UK, despite perpetually harping on about its Anglospheric relationship with the US, has similarly distanced itself from the US’s hardline Chinese decoupling strategy.

The US hasn’t managed to assemble a gang of diehard supporters on whose political allegiance it can depend. It faces a spectrum of more or less friendly nations doing case-by-case trade-offs about which of Washington’s initiatives they want to support, decisions in which commercial considerations will inevitably play a part. It’s an awkward situation for a president who has just declared his intention to stand for re-election on a platform of creating jobs at home rather than sending them abroad.




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