“For countries or companies trying to comply with the US in good faith, there should be some kind of carrots,” South Korean Trade Minister Cheong Inkyo said in his first interview with media since he took office in January. “That would help US policy be embraced more easily.”

South Korea is among a handful of semiconductor powerhouses that face a potential US ban on exports to China of state-of-the-art chips, including high-bandwidth memory, used to train artificial intelligence (AI).

Bloomberg News reported last month the US is working on several restrictions aimed at limiting sales of AI chips and equipment. One possible stick the US could wield is the foreign direct product rule, which allows American officials to control the flow of foreign-made products that use even the smallest bit of US technology.

The US is the dominant equipment and material player in half of 10 key chipmaking stages singled out by Bloomberg Intelligence, including etching, plasma deposition and sputtering, with Japan and the Netherlands controlling the rest including wafer cleaning and lithography. South Korea’s SK Hynix Inc and Samsung Electronics Co have long relied on technology, materials and expertise provided by the US and its allies.

South Korea is currently unable to send China the types of chipmaking equipment that would enable next-generation technology, Cheong said. He anticipates overall semiconductor trade between the two countries to decline in the long run due to various limitations.

Cheong declined to specify what US incentives would be welcome, or comment on whether Seoul and Washington are in talks over export controls on the latest technology. He said his country would respond to any additional restrictions by exploring ways to reduce business disruptions. “We will have to find a way to the extent that the impact on our companies’ business is minimised,” he said.

While the US measures under discussion would curb direct sales of high-bandwidth memory chips to Chinese companies, it’s unclear whether those bundled with AI accelerators from the likes of Nvidia Corp would still be allowed. 

South Korea has a history of winning concessions from the US over its technology operations involving China. Last year, Washington gave SK Hynix and Samsung indefinite waivers to ship equipment to their chip plants in China.

Negotiations with the US have also allowed South Korean chipmakers to largely maintain their profitability despite cutting relations with entities of concern designated by Washington, Cheong said.

Existing concessions came after President Yoon Suk Yeol’s discussions last year with US President Joe Biden, whose administration also understood sudden limitations could weigh on global supply chains for chips that American companies rely on.

Biden has since dropped out of the November presidential race, raising the stakes higher for South Korea as Donald Trump battles it out with Vice President Kamala Harris.

If Trump wins, South Korea would benefit by replacing some of China’s exports to the US, but the competition it faces from China would get tougher elsewhere, Citi Research economists Jin-Wook Kim and Jiuk Choi said in a report. A Harris presidency could lead to higher corporate taxes in the US that would weaken demand for South Korean products, they said.

Cheong declined to say which candidate would be more favourable for South Korea’s trade interests. Regardless of who gets elected, Seoul will be watching the impact on a range of areas, from technology to supply chains. “The bigger the shock, the worse the scenario,” he said.

A positive scenario would be one where a multilateral trade framework that has been led by the World Trade Organization remains respected and maintained, he said.

Whoever becomes president, South Korea will be aligned with the US over economic-security issues as their security alliance is a cornerstone of their relations, Cheong said. Still, he stressed that his country remains deeply interwoven with China economically, saying China accounts for roughly half of South Korea’s semiconductor sales and that their industries have shaped themselves over the years in an “interlocking” relationship.

While the US has largely caught up with China in terms of overall demand for South Korean products, a breakdown of July trade shows almost half of exports to China consisted of chips and other electrical equipment. Meanwhile, those products made up only 18% of South Korean shipments to the US, according to Je Heon Kim at the Korea Economic Institute of America. That means it remains unclear how strong a replacement the US could be for chip demand.

“We have had a closer economic relationship with China than with any country in the era of globalisation,” Cheong said. “China is important to us, too.” 

  - Bloomberg