A Korean truck driver loads urea solution amid shortages caused by a Chinese ban on exports. Image: Twitter / Yonhap

SEOUL – The middle ground between China and the United States is collapsing under South Korea’s feet as it is torn in opposite directions by the two giant economies it seeks to balance between.

On the one hand, it is being “requested” to submit detailed information on its flagship industrial sector to the United States which is also pressuring the country’s number-two memory chipmaker to halt shipments of advanced machinery to China. That move could halt an upgrade to a major DRAM fab, in a sector where large-scale capital investment is crucial.

On the other hand, the country’s diesel vehicle drivers are suffering from operational angst after China halted exports of urea, used to make a solution that caps diesel emissions.

Former Korean War foe China is Korea’s largest trade partner. However, South Korea shares its political system, and its only significant security alliance and defense relationship, with the United States.

This is creating an increasingly fraught situation for a country at the center of trans-global supply webs in industries including semiconductors, electronic devices, autos, shipping, steel and petrochemicals, and for which international trade is the economic lifeblood.

Chip angst, urea shortages

The number two player in Korea’s leading industry is currently being buffeted by risks swirling in the international trade environment as logistical problems and political animosities impact the value chain.

Chipmaker SK hynix, had planned to dispatch extreme ultraviolet lithography (EUV) machines made by Dutch firm ASML as it seeks a major modernization of its DRAM semiconductor plant in Wuxi, China.

However, with the US holding a wide range of patents in chip-making technology and design, and with Washington having identified semiconductors as an Achilles heel in China’s industrial portfolio, it is applying pressure to prevent the Korean firm from shipping the equipment to China, according to a Reuters exclusive report last week.

Hynix’s Wuxi fab makes approximately half of SK hynix’s DRAM chips, which amount to some 15% of the global total, Reuters found.

“The technology in question is highly sensitive…. there are legitimate concerns about the risks to national security in terms of where this technology ends up,” visiting US Trade Representative Katherine Tai said in an interview with domestic media in Seoul on Monday.

The US is reportedly worried that ASML’s EUV machines could be used by the Chinese military. ASML’s CEO Peter Wennink also travelled to Seoul last week according to local media. SK hynix’s CEO Lee Seok-hee was keeping matters close to his chest on Monday, telling reporters only, “We will respond to the matter wisely while cooperating with interested parties.”

South Korea’s SK Hynix is caught in the middle of a Beijing-Washington dispute that could delay or halt the modernization of a key plant in China. Photo: AFP/Jung Yeon-Je

In what may be an indication of the seriousness of matters, Tai is on a four-day visit to South Korea – the first visit by a US trade secretary to South Korea in a decade – that also takes her to two other Indo-Pacific allies, India and Japan. She met Korean business representatives over the weekend.

Previously, in September, Washington had asked major international chipmakers to share detailed dossiers of corporate and technological information, a surprise request that raised hackles in local media and political circles.

“South Korea is deeply concerned that the request for information by the US government is not only broad in scope, but also includes some key corporate secrets of our companies,” Korea Trade Minister Yeo Han-koo told Tai in Paris in October.

Even so, the country’s two leading chipmakers, Samsung Electronics and SK hynix submitted the requested information earlier this month.

“The request for information is a part of the US government’s effort to try to identify the bottlenecks because our partners in industry and in governments have shared with us and we’ve experienced ourselves that there are information gaps about where the problems are in the supply chain through production and also among the customer base,” Tai said.

And chips are not the only supply chain issue Korea is struggling with.

Urea is widely used in South Korea as the base of urea solution, a chemical used in diesel vehicles to cap emissions. According to the semi-official Yonhap news agency, 97.6% of South Korea’s urea imports came from cost-efficient producer China in the first nine months of this year, up from 88% in 2020. 

Beijing imposed urea export restrictions in mid-October as the country was hammered by blackouts, partly caused by a shortage of coal, from which urea is extracted. Ironically, one reason China suffered a coal shortage was its long series of political and trade disputes with Australia, a key exporter of raw materials including coal.

The effect on South Korea has not been catastrophic but has been alarming.

Reports over the last two weeks have aired footage of lines of trucks queuing up at supply stations to acquire the product, owners of diesel cars lining up on foot with buckets with the same intention, and uniformed troops transferring boxes of urea to civilian supply centers.

In flashing red-light mode, Korea has lifted tariffs on urea and shipped in emergency airlifts of the product from Australia. Seoul reportedly plans to diversity its urea supply to Vietnam and Saudi Arabia and raise national stockpiles. It is also turning the taps back on domestic supply.

This week, the crisis appears to be dying down. Still, it has renewed bad memories of the steps taken by an angry Beijing in 2017.

That year, US troops deployed a THAAD missile defense system in South Korea in a step aimed at North Korea – but which China insisted could snoop on its own systems.

In apparent retaliation, Chinese travel agents halted group tours to South Korea, while consumer boycotts damaged the Chinese operations of automaker Hyundai and forced Lotte to close down retail operations in the country. And imports of “Korean Wave” products – movies, TV dramas, pop and games – largely dried up.

THAAD interceptors and a Standard-Missile 3 Block IA missile being launched. Photo: AFP / DoD / Missile Defense Agency

Supply chain – or vulnerability chain?

Supply chain storms are becoming uncomfortably frequent for an industrial powerhouse whose exporters have, since the 1960s, massively enriched their country by astutely leveraging the potential of global trade.

The recent collateral damage stemming from the Beijing-Washington trade spat is just the latest crisis facing Seoul mandarins and captains of industry.

In 2018, as historical and political tensions rose to a breaking point, Tokyo removed Korea from its “white list” of favored trade partners, and placed onerous bureaucratic restrictions on the supply, by Japanese companies, of three products critical to Korea’s semiconductor sector.

Though Tokyo’s action slowed, but did not halt, the exports, Korea reacted by diversifying its own supply chain and turning to domestic manufacturing. There was considerable self-praise in government and media about how the country had overcome what was widely seen as a challenge from a key national competitor.

Yet the weaponizing of both trade and supply chains is clearly far from over. A glance at trade figures compiled by data provider Worlds Top Exports showcase South Korea’s vulnerabilities.

In 2020, in a continuation of long-term trends, China was Korea’s leading trade partner, buying a whopping $132.6 billion worth of South Korean products, or 25.8% of overall exports.

The United States, was in distant second place, buying $74.4 billion (14.5% of total).  Adding to China’s heft, Korea’s fourth-largest partner was Hong Kong, which acquired $30.7 billion (6%). The fifth-placed nation was Japan, with $25.1 billion (or 4.9%).

This data shows that Korea has suffered high-profile supply chain issues in recent years with all of its top export buyers – bar number three player Vietnam (which in 2020 bought $48.5 billion worth, or 9.5% of Korean exports).

Which way to turn?

Orville Schell, the Arthur Ross Director of the Center on US-China Relations at the Asia Society in New York, suggested that the best days of global trade may have passed.

A shortage of coal has led to reduced exports of urea from China. Photo: AFP / Li Xiaolong / Imaginechina

Speaking on a webinar, “South Korea’s Supply Chain Disruptions” hosted by the Seoul branch of the Asia Society last week, Schell said that now that China and the US were no longer on “convergent courses… countries like Korea, that have traditionally wanted to stay in the middle, find themselves stuck in the middle.”

This means that “the ground where you could have an alliance with the US and trade with China is shrinking daily,” Schell, the author of ten books on China and a member of the Council on Foreign Relations, added.

He was careful to avoid blaming Seoul for the predicament it finds itself in.

“I don’t think Seoul’s position is wrong per se, I think it is really important that countries like Korea and Singapore, try to keep a position that can play to both sides,” he said.

“However, I think Korea sometimes is a little bit blind to the realities of the trends, and I sometimes wonder whether Korea has an adequate appreciation of what the alternative scenarios are if things continue to go as they are now.”

Schell saw villains in both camps

“We are all adjusting to a post-engagement world where we could usually rely on a relationship with China that trade was not generally used as a punitive tool,” he said. “This is something quite new with Xi Jinping; Deng Xiaoping was not a nationalist, nor was Jiang Zemin or Hu Jintao; there is something new happening here as China gets stronger.”

Washington did not escape criticism.

“It is shocking that the Americans can’t even get ambassadors to key countries like Korea and China,” Schell lamented. “This is part of the dysfunction of the American political system, which has very harmful effects around the world.”

Trade Representative Katherine Tai says there are concerns about the risks to US security in terms of where chip-making technology ends up. Photo: AFP / Susan Walsh

Though trade warrior Donald Trump has exited the White House and a more conventional leader, Joe Biden, has entered, Washington looks set to remove its kid gloves in trade.

“I think Korea and every county is going to find a much more aggressive policy coming out of Washington in terms of making good trade arrangements,” Schell said. “I don’t think we are at the point where the [multinational] Trans-Pacific Partnership is coming back on board – though I wish we did.”

He advised Seoul not to keep betting on the status quo.

“I think Korea needs to be more realistic about what the future may hold – we see intimations and suggestions of it everywhere,” Schell said. “To ignore these and hope that the middle ground will continue to be viable, I think, is very naïve.”

But one Korean, who spoke to Asia Times on condition of anonymity as he has sensitive professional relationships with North Korea, called for a more radical response.

He advised that the next Seoul government, which will take office in May after an election in March, should not shift to one side or the other, but should use policy to reset off-kilter national vulnerabilities.

“We need to rebalance our relationships,” he said. “We need to be more integrated with security with China, and more integrated with the economy of the United States.”