Preparing for Round 2 of US-China Supply Chain Conflict

China has banned the export of four technologies related to the refinement, processing, and use of rare-earth elements used in the production of many state of the art products. China officially explained this was done for national security and to protect the public, but it appears that China intends this to challenge the United States’ expansion of trade restrictions. It’s almost as though the level of weaponization of rare-earth elements has been raised even further. The U.S. previously investigated the extent to which local companies recently imported and used low-cost Chinese general purpose semiconductors following the control of exports on advanced semiconductors. Some observers say it is an import control review of the Chinese general purpose semiconductors. One evaluation posits that the U.S.-China summit last month provided an opportunity to stabilize relations, but worries might arise about a second round of conflict over supply chains between the two sides in the field of economy and trade.

The influence of China’s ban on the export of rare-earth mineral processing technology on South Korea’s domestic industry is limited at the moment, but South Korea cannot relax. Rare-earth minerals, known as the vitamins of the high-tech industry, are used in the production of advanced products such as smartphones and electric cars, and through these key minerals, China occupies about 60% of the world’s rare-earth mineral production and close to 90% of the world market’s share of processing and refinement. We need to prepare for China’s complete regulation of rare-earth minerals and similar worst case scenarios. In the first half of this year, 79.4% of rare-earth metals went into semiconductors. Reliance on China’s rare-earth mineral permanent magnets, which determine the efficiency of electric car engines, also reached 85.8% in the first half of 2023. It’s not only rare-earth minerals; Korea’s supply chain dependence on China is absolute. Dependence on China for gallium and germanium, part of China’s export restrictions last August, was 87.6% in the first half of the year. We should accelerate efforts to diversify supply chains, become self-reliant, directly develop overseas resources, and expand core mineral reserves.

Any U.S. interference with the control of imports of Chinese low-cost general purpose semiconductors could also affect Korean products, which also use these semiconductors. Korea must prevent potential problems such as the unexpected disadvantage to the Korean auto industry that occurred as a result of the U.S. Inflation Reduction Act. Due to economic uncertainty, there is a strong chance that increased supply chain risk and a deepening wave of global nationalism will also continue into next year. Private and public sectors should operate on a closed response system and manage the protection of economic and security interests perfectly. Above all, there should not be any gaps in identifying trading tendencies in major countries and acting preemptively in the national interest.

There must be effective follow-up to the fundamental supply chain law passed by the Korean National Assembly this month to avoid any setbacks. The Korean government plans to install a supply chain committee that will play a role in a pan-government control center in which the central administrative agency and economic security experts will participate by June of next year, and promote the designation of economic security items such as essential supplies and raw materials, increase an effective early warning system and establish a supply chain stabilization fund. The Korean government recently designated 185 items that have a huge influence on the national economy as stable supply chain items and announced an Industrial Supply Chain 3050 Strategy aimed at lowering the import dependence of certain countries, which is around 70%, to below 50% by 2030. The government hopes that the third deputy director of the Security Office, who will oversee economic security and related ministries, will be prepared for the possibility of supply chain instability.