The importance of trade security has emerged as the United States and China compete for technological supremacy under the banner of economic security that links their national security and economy. The US-China hegemony competition is not a military confrontation, but a confrontation that uses the economy as a weapon. Accordingly, attention is being paid to maintaining technological competitiveness over other countries and resolving dependence on unreliable countries, namely, supply chain risks.
In particular, the shortage of personal protective equipment for healthcare workers in the early stages of the 2020 COVID-19 pandemic and the blow dealt to the automobile industry by shortages in semiconductor chip supply have prompted the United States to restructure its supply chain. On February 24, 2021, President Biden issued an Executive Order for America’s Supply Chains (E.O. 14017), which ordered a 100-day supply chain review report for semiconductors, batteries, critical minerals and materials, and pharmaceutical supply chains. In addition, by February 2022, specific policy alternatives are expected to be presented along with risk assessments for the defense, health and bio, information and communication, energy, logistics, agricultural products and food-related industrial bases.
As analyzed in this study, the most critical issue raised in the White House’s 100-day supply chain report is the lack of advanced production capacities within US borders. The US and global economies have continued on toward deeper division of labor in pursuit of economic efficiency, with the US concentrating on high value-added industries where it possesses comparative advantage in the global supply chain, prompting the collapse of domestic manufacturing bases. Thus, the US is expected to engage in a more sustainable growth strategy which incorporates new and broader perspectives through industrial policies that place more of an emphasis on the government’s role.
As it strives to bolster the stability of its supply chain, the US will engage in efforts to diversify procurement sources by increasing domestic production and strengthening its relations with allies. More of a focus will likely be placed on fortifying production bases within US borders, rather than expanding its foreign supply chains. Through these efforts, the US will aim at reviving domestic manufacturing industries, maintaining competitiveness in R&D sectors, providing quality jobs while supporting smaller businesses, responding to climate change, and reducing economic inequality.
Upon closer inspection of the supply chain for semiconductors, batteries and rare-earth elements (REEs), it can be assessed that China-associated risks are lowest in the global market for semiconductors. China mainly serves as a consumer market for over 60% of all global semiconductors, while its role in the supply chain remains limited to assembly, testing, and packaging (ATP) operations. On the other hand, the US and its major allies and partners occupy critical points in the supply chain for semiconductors. This poses a supply chain risk for China instead, motivating it toward indigenizaiton policies in the area. China, however, lacks the core technologies necessary to produce advanced chips 10-nm or smaller, making prospects dim for eliminating these risk factors in its supply chain through domestic production.
In the supply chain for batteries, Korea, China, and Japan share the global market for end products. While this can be seen as a positive situation for the US in terms of ensuring a stable supply chain through cooperation with allies, it becomes more difficult for the US to decouple from China in the areas of key components of Li-ion battery - cathode, anode, electrolyte, separator - and raw materials. Of course, China currently lacks core technology in cutting-edge battery manufacturing sectors, making the global supply chain for batteries an area where all countries are mutually dependent on each other, and no one country, or group of countries, can dominate.
China possesses a particularly strong position in the supply chain for rare-earth elements. Due to concerns over radioactive waste resulting from separation and purification processes, China is practically the only nation conducting these operations, and when considering the majority of heavy REE reserves are located within China, there is a definite risk in the supply chain for the US and other nations. At the same time, however, according to the results of this study, China imports approximately 30% of its permanent magnets from Japan, a key product that uses REEs. This indicates a high dependence on foreign (Japanese) sources on the part of China, particularly in REE production areas requiring advanced levels of technology.
In conclusion, upon close examination of the global supply chain for semiconductor, battery, and rare-earth element products, it becomes clear that no one country or business can establish an entire supply chain on its own. A likely scenario will be nations diversifying their respective supply chains around reliable allies or partners to curb excessive dependence on any particular country. In other words, it will not be possible for any single country to unilaterally weaponize the global supply chain ? neither are we likely to see any extreme forms of decoupling between countries.
One thing we can expect is the US continuing its decoupling from China in cutting-edge tech sectors, with the aim of keeping China in check as the two nations engage in strategic competition. This can be seen in such cases as the US blocking Chinese chipmaker SMIC from importing EUV equipment from the Dutch company ASML. At the same time, however, the US government is not opting for an industry-wide decoupling or isolation strategy against the Chinese semiconductor industry, as China serves as the largest market for US firms producing semiconductor manufacturing equipment. Also, any extreme measures by the US could be countered by China leveraging its dominant position in REEs and raw materials for battery production.
A key point of interest is that, as economic and trade issues are increasingly becoming security issues, thus contributing to the rise of uncertainty, and major economies actively utilize industrial policies to promote security in their supply chains, specific goods necessary to maintain national competitiveness can also be treated as strategic items, going beyond the traditional categorization of certain goods to promote international peace and security. Also, should major economies continue efforts to localize their supply chains, this could have mid- to long-term implications for the Korean economy, as the semiconductor and battery manufacturing sector could enter into a state of free-for-all competition. Recognizing these possibilities, Korea should go beyond efforts to stabilize its own supply chain, also working to occupying a key position in the global supply chain.
