GCG 2023-09-08
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South Korea-U.S.-Japan Trilateral Cooperation for Supply Chain Resilience

South Korea-U.S.-Japan Trilateral Cooperation for Supply Chain Resilience

Background of the Trilateral Partnership for Supply Chain Resilience

In an effort to develop its semiconductor industry, the Chinese government launched the national industrial policy “Made in China 2025 (MIC 2025),” which aims to raise the Chinese-domestic content of core components and materials to 70 percent. As part of this initiative, the Chinese government has been supporting individual companies and heavily investing in improving the industry’s infrastructure. The U.S. Semiconductor Industry Association (SIA) announced that China announced 28 new semiconductor factory projects in 2021 alone, with a total investment of $26 billion.

However, even without the threats posed by China's aggressive investment in semiconductor manufacturing and other advanced technologies, U.S. supply chains have been viewed as problematic due to its heavy reliance on China. For instance, Apple announced the iPhone 14 in September 2022 and opened pre-orders but had to delay shipments of the popular iPhone 14 Pro by approximately five weeks from the announced date. This delay was caused by disruptions in the Foxconn factory in Zhengzhou, the iPhone manufacturing hub, due to China's stringent COVID-19 restrictions. 

In this regard, the U.S. has tried to minimize its dependence on China and separate its global supply chains for core materials such as batteries and semiconductors.

Specifically, in January 2021, the Biden government announced Executive Order 14005 on Ensuring the Future is Made in All of America by All of America’s Workers, which mandates the use of goods, products, and materials produced or manufactured by American businesses or workers. This Executive Order reinforces domestic content procurement preference requirements and strengthens the requirements for foreign procurement. In May 2022, the U.S. government also enacted the Infrastructure Investment and Jobs Act. The “Buy America Sourcing Requirements” section of this Act ensures the use of U.S.-produced materials in federal infrastructure programs.

Furthermore, in March 2022, the U.S. proposed the Chip 4 Alliance, which comprises governments and major semiconductor companies in South Korea, Japan, and Taiwan. This proposal clearly expressed the U.S.’ intention to exclude China from its global semiconductor supply chain. Subsequently, the U.S. signed the Chips and Science Act (the “CHIPS Act”) into law in July 2022. Originally a part of the Senate’s U.S. Innovation and Competition Act (USICA), a more comprehensive bill addressing competition with China, the CHIPS Act focuses on promoting domestic semiconductor manufacturing. The CHIPS Act prohibits companies receiving U.S. government subsidies from constructing or expanding advanced semiconductor manufacturing facilities in "countries of concern." Additionally, in August 2022, the U.S. enacted the Inflation Reduction Act (IRA), which provides differentiated tax incentives based on the origin of battery components and critical minerals for electric vehicles produced in North America. 

Against this backdrop, the leaders of South Korea, the U.S., and Japan jointly inaugurated a trilateral partnership during their summit at Camp David on August 18, 2023, to enhance supply chain resilience by reducing their dependency on China and establishing an independent supply chain. The following report outlines the general details of the trilateral supply chain partnership between South Korea, the U.S., and Japan.

Significance and Implications of Trilateral Partnership for Supply Chain Resilience 

In the joint statement issued by the leaders of South Korea, the U.S., and Japan on August 18, 2023, the trilateral supply chain cooperation between the three countries will involve the following objectives: (i) to designate critical items such as semiconductors and critical minerals; (ii) to identify key partner countries in the supply chain to procure the designated critical items; (iii) to exchange information among the South Korean, U.S., and Japanese diplomatic missions in these identified nations on their policy trends and critical items; and (iv) to establish an early warning system (EWS) to monitor and prepare for potential supply chain disruptions, particularly from countries like China, and coordinate a joint response through regular consultations. Further details to set up this system, including the identification of critical items and key partner countries, will be discussed in the upcoming third round of the Trilateral Economic Security Dialogues, the latest in the series of dialogues on economic security held in February and July 2023, respectively.

Another notable feature of this trilateral supply chain partnership is that advanced technologies such as AI, quantum computing, space technology, and supercomputing have been conceptualized as "Critical and Emerging Technologies." In light of this concept, the leaders of the three countries plan to establish a collaborative platform in order to facilitating cooperation of the entire process for the development of these Critical and Emerging Technologies, including joint development, international standardization, technology protection, and workforce exchange. Experts anticipate that these collaborative research efforts will be focused on the development of core future technologies such as advanced computing, AI, new materials, climate, and earthquake modeling.

Along with Germany, France, the U.K., and Italy, South Korea, the U.S., and Japan are members of the "30-50 Club," which are countries with a per capita GNI of over $30,000 and a population of over 50 million. These three countries have very strong economic and technological capabilities, collectively supplying approximately 80 percent of the world's semiconductor manufacturing equipment. Considering South Korea's strength in manufacturing, the U.S.'s expertise in various foundational technologies, and Japan's leadership in critical materials, the synergistic effect created by this alliance is expected to be tremendous.

DR & AJU’s Comments

Although trilateral cooperation on early warning systems can greatly benefit South Korea’s supply chain resilience as it can utilize the information and diplomatic relations of the U.S. and Japan to address critical mineral procurement and technology issues, experts anticipate strong opposition from China. For instance, when the U.S. and the Netherlands restricted exports of semiconductors and semiconductor manufacturing equipment, China retaliated in August 2023 by imposing its own export restrictions on rare metals like gallium, required to manufacture semiconductors, and germanium, required to manufacture display materials.

According to the United States Geological Survey (USGS), the U.S. relies heavily on China for rare earth metals and compounds, with Chinese imports accounting for approximately 78 percent of the total import value of $160 million in 2021. South Korea also greatly depends on China for critical materials and minerals, including the dysprosium used in lasers, missile guidance systems, nuclear reactors, permanent magnets, and neodymium used in batteries and semiconductor production, as well as critical substances like fluorine and neon.

As a result, South Korean exporting companies that manufacture semiconductors, batteries, etc., should closely monitor specific policies that will be introduced as part of the trilateral supply chain alliance and observe China's stance and response towards this alliance.

DR & AJU’s Washington, D.C. Liaison Office and D&A Advisory, Inc. deliver accurate and crucial information to help both domestic and export companies to effectively and promptly respond to changes in South Korea-U.S.-Japan policies and Chinese relations and establish tailored strategies to ensure compliance with applicable laws by providing comprehensive advisory on implementing internal control strategies. 

DR & AJU will continue to closely monitor policy updates of the U.S., Japan, and China in order to respond expeditiously through close cooperation with businesses when necessary.

Introduction to GCG

DR & AJU’s Global Compliance Group (the “GCG”) was founded with the purpose to prevent and minimize corporate risks for companies in Korea. GCG's goal is to create a favorable business environment by providing strategic solutions to prevent, manage, and minimize various risks a corporate entity may face doing business domestically or globally.

DR & AJU GCG provides various risk management services from pre-transaction investigation, strategic research, and field investigation to review of a potential dispute, monitoring, and representing in litigations and post-litigation follow-up work. Furthermore, GCG aims to be a strategic partner to our clients in their creative management by predicting and preparing political and regulatory risks due to changes in global dynamics or political landscape that our clients may face in or out of Korea.

DR & AJU GCG team comprises experienced lawyers of various backgrounds, including the prosecution, police, politicians, administration officials, military generals and intelligence officers, national security authorities, North Korea experts, investigators, computer forensics experts, and financial and media experts.