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Intel’s logo. (Reuters/Yonhap)

By Kim Yang-hee, professor of economics and finance at Daegu University

The US adopted its CHIPS and Science Act in 2022 with the aim of freeing itself from a situation where it had to rely on East Asia for foundry of the advanced semiconductors that are crucial to success in its strategic rivalry with China.

The legislation was emblematic of the reemergence of “industrial policy” in the form of government interventions meant to support specific industries or businesses in a given country. Its number-one beneficiary was the US company Intel, and it also led to investments in the US by Taiwan’s TSMC and Korea’s Samsung.

But now, two years after the law went into effect, these industrial policies to revive US semiconductors have run into roadblocks.

Intel, which has struggled with its technology stalling at the 7 nanometer level in 2018, recently made the decision to spin its foundry business off. TSMC has continued putting off its timeline for beginning mass production, citing factors such as a shortage of highly skilled engineers, difficulties adapting to US labor practices and organizational culture, and rapidly rising construction costs. After battling with low yields, Samsung ultimately decided to temporarily pull out from its foundry fab under construction in Texas, leaving only a veritable skeleton crew behind.

The situation has left the US threatened with the ills that have traditionally resulted from industrial policy: inefficient resource distribution and the resulting wastefulness and entrenchment of a high-cost structure.

At the moment, this is still only at the level of a predictable obstacle, rather than a predictable failure. That is why everyone's watching to see what the US does next.

The origins of industrial policy date all the way back to the 14th century. In recent years, it was largely forgotten before making its reappearance.

By 2023, over 2,500 industrial policy measures had been implemented, resulting in a subsidy race among countries. Over two-thirds of these measures have been discriminatory trade distortion measures; around half have been put in place by the US, China and European Union (EU); two-thirds have strategic aims primarily relating to the green transition, supply chain recovery capabilities, and security (IMF and Global Trade Alert 2024).

But will all these measures actually do what they intended? To answer that question, we may look at the history of US industrial policies over the past half-century.

Of the 18 major industrial policy measures adopted by the US since 1970, the only example that has really been rated positively is the establishment and nurturing of the Defense Advanced Research Projects Agency, or DARPA, which has fostered research and development without being selective about industries and companies.

Semiconductor advancements have been the result of DARPA’s success, not its cause. In contrast, industrial policies that have been combined with protectionist trade measures meant to artificially boost declining industries have more or less totally failed.

From South Korea’s standpoint, two questions may be raised here.

First, what is the US’ “plan B” for Intel’s crisis? If the US efforts to rescue Intel are successful, that would threaten Samsung’s status as the No. 2 global foundry business.

But a look at Intel’s current state suggests the US government’s support to Intel amounts to a carrot without a stick — or pouring money down the drain. In this case, the US’ plan B is to become like TSMC or Samsung. But it would seem that the biggest beneficiary there would be TSMC, which does not have to compete with its own customers unlike Intel and Samsung.

Whatever the scenario is, it is more bad news than good for Samsung. What’s more, there is no guarantee that the US won’t force the sale of shares its US branches in the name of “economic security” as Japan has recently done.

The second question has to do with the path forward for South Korean industrial policy in light of the US’ historical precedent.

An objective look at the situation suggests that while South Korea’s foundry prospects remain unclear, it also faces a difficult battle holding on to its status as a memory superpower.

Just as competitiveness in semiconductor manufacturing migrated historically from the US to Japan and then South Korea, it appears certain to shift over to China at some point. 

The subsidence of South Korea’s overall manufacturing industry base has already become an irreversible tendency. This indicates that there is no royal road ahead of it.

The only way to put off the inevitable is by transitioning to high value-added, non-substitutable items such as high-bandwidth memory (HBM). Achieving that will require us to form an open innovation ecosystem in South Korean manufacturing, while promoting R&D and prioritizing researchers in ways that don’t anoint the winners ahead of time.

The myopic approach of drastically reducing R&D budgets in order to wipe out supposed “research cartels” will only succeed in sending researchers and technology over to rival nations.

The year 2023 saw a total of 28 incidents involving the leaking of industry technology — the highest number in the last five years. Over half of these involved semiconductor technology; in two-thirds of cases, China was the recipient.

Since South Korea is not in a position to win a battle of subsidies with the major powers, it should instead focus on international cooperation to create a fair, rule-based level playing field, while guarding itself against the worsening trade wars to come. Essential tasks include opening up new markets through free trade agreements, strengthening alliances with middle powers, and laying the groundwork for China’s compliance with international trade rules within the Regional Comprehensive Economic Partnership framework.

It will be difficult for our administration to develop intermediate- to long-term strategic plans or sign trade agreements when it is in such a precarious state, with approval ratings in the 20% range. Political stability is essential for overcoming a zero-visibility global environment. 

Please direct questions or comments to [english@hani.co.kr]