Crystal Pryor
Dec. 1, 2022
Chipping away at economic vulnerabilities: A Herculean team effort
The “Made in China 2025” plan triggered a cascade of strategic policy changes in the UnitedStates, initially focused on controlling exports of and foreign investments into emerging andfoundational technologies. More recently, the United States has focused on domestic investment,
namely through the $52.7 billion CHIPS and Science Act. Today, the United States and its
partners in Asia face a delicate balancing act between technology control and promotion -- bothof which are costly endeavors. Without careful policy planning that considers the unintended
consequences of technology controls and industrial promotion policies, and support from its East
Asian partners in multilateral arrangements, the United States will suffer the costs without reaping
the benefits of controls or investment.
A review of the US government’s approach to managing semiconductors illustrates the costs ofboth investments and technology controls and offers considerations for areas of improvement.
Promotion: Semiconductor investments in the United States and East Asia
Semiconductors are a foundational technology that enable everything from automobiles to mobilephones to high-end military weapons. Chip shortages have hurt a wide range of industries,
affecting economic growth, jobs, and consumer wallets across the world. The U.S. Department ofCommerce estimated that chip shortages cost $240 billion of U.S. gross domestic product in 2021.
While the United States leads the world in global semiconductor revenues, at least three quartersof semiconductor manufacturing occurs in East Asia. The United States has strength in chip
design, but desperately needs to compliment what it lacks, including the foundry business.
Samsung and South Korea’s SK Hynix are global leaders in memory, and Taiwan’s TSMC
dominates the non-memory sector and foundries. Japan is home to some of the world’s leading
semiconductor materials producers and equipment makers.
Supply chain shortages and a perception of increased vulnerability of Taiwan -- the world’s chip
manufacturing powerhouse -- have led countries around the world to refocus their investment intoand protections around semiconductors.
In the United States, the CHIPS and Science Act was passed on Aug. 9, 2022, with bipartisan
support; and provides $52.7 billion for American semiconductor research, development,manufacturing, and workforce development. Yet this is only a drop in the bucket compared to theamount needed for the United States to fully re-shore semiconductor production.
East Asian countries have long invested in nurturing their semiconductor industries – the resultsof which are evident today – but the size and pace of investment in recent years is notable.
Since 2014, China has invested over $30B in the semiconductor industry, part of this under theMade in China 2025 initiative, and plans to spend at least another $25B.
The government of Japan has committed $4.5 billion for the development of specificsemiconductor production facilities among other supportive policy measures.

South Korea is increasing tax incentives so its private companies will invest $451 billion over thenext ten years into the semiconductor industry and recently passed a special act to support hightech strategic industry, namely semiconductors.
Finally, companies in Taiwan plan to invest $120 billion into semiconductors by 2025 and thegovernment has supportive policies such as investment in education (“chip schools”).
The Fab 4 Alliance: A fabulous idea with a murky future
Beyond the CHIPS Act -- which centers on bolstering domestic production of semiconductors -the United States, led by the State Department, has also pursued what it calls the “Fab 4” alliance(often reported in media as “Chip 4” alliance). This is a proposed alliance of the United States,Taiwan, Japan, and South Korea to enhance cooperation on the design and production ofsophisticated semiconductors.
Initially proposed over a year ago, the grouping finally held its first meeting at the end of
September, to little fanfare. It was hosted virtually by the American Institute in Taiwan and wastitled the “U.S.-East Asia Semiconductor Supply Chain Resiliency Working Group.” No follow-on
meeting appears to be planned. Nevertheless, this grouping highlights the importance of therelationships between East Asian countries and their industry players; and of multilateralism inachieving U.S. strategic and industrial objectives.
Of the Fab 4 countries, Japan, in its recent pursuit of economic security, is the most closelyaligned with the United States. Since the end of World War II, the United States and Japan havebeen steadfast allies, but have not always been aligned on their economic priorities. Recent
institutional and policy-level changes in Japan have brought the world’s third largest economy
more in step with current U.S. economic security initiatives.
The United States and Japan have three bilateral partnerships of note: the U.S.-Japan
Competitiveness and Resilience (CoRe) Partnership, which focuses on economic cooperation indigital economy, Open RAN, 6G, cybersecurity and critical infrastructure resilience, and includes
semiconductors. The Japan-U.S. Economic Policy Consultative Committee (Economic “2+2”) isa ministerial level discussion between Foreign Ministers and Economic Ministers on economic
security issues that include semiconductors. Finally, the Japan-U.S. Commercial and Industrial
Partnership (JUCIP) is focused on collaboration in semiconductors, export controls, digital
economy, and trade and investment.
The two countries also participate in two regional groupings -- the Quad, which has recently
focused on cooperation on semiconductor supply chains, 5G deployment, and biotechnologies
monitoring; and the Indo-Pacific Economic Framework (IPEF), invoking cooperation on trade,
supply chains, clean energy, and taxes and anti-corruption. IPEF is not explicit on semiconductors
but coordination on them is implied.
As with all countries in East Asia, however, China has always been an important market for Japan.
Japan continues to consider the economic impact of any actions it takes against China on
semiconductors or other critical technologies.
Taiwan is glad to be involved in a multilateral grouping that improves its resilience against China.
Yet the Fab 4 alliance is the only technology or semiconductor-focused initiative to which it has
been invited. As Kristy Hsu notes, although the Biden Administration launched the bilateral

Taiwan-U.S. Initiative on 21st Century Trade, “Taiwan is still denied from access to information
sharing with other stakeholders in the semiconductor supply chains and engagement with them.”
China is also a key market for Taiwan’s semiconductor industry. More than half of Taiwan’s chip
design revenue comes from China. Taiwan has been seeking to mitigate its exposure to China
since 2017. In addition to the Fab 4 countries’ concern about cross-Strait relations generally,
South Korea has expressed concern about Taiwan’s political status.
For its part, South Korea has been willing to engage in the Fab 4 discussion, but is the mostreluctant of the East Asian countries to sign on. For one, Korea is concerned about retaining
Chinese business. China comprises nearly 40% of the South Korean semiconductor export
market. Second, Korea’s largest fab companies, Samsung and SK Hynix, have plants in China.
While President Joe Biden and President Yoon Suk-yeol agreed to “step up” their “practicalcooperation” on semiconductors (among other fields), the semiconductor industry is cut-throat.
The two countries “fundamentally are technological competitors.” Each is suspicious of the other’s
industrial policies on semiconductors, as experts discussed in a recent Pacific Forum event.
Indeed, all countries in the Fab 4 grouping have concerns about competitiveness and excessiveU.S. government intervention into semiconductors. The countries have different interests andstrengths, which could lead to complementarity, but also to hurdles in harmonizing policies. Akira
Igata of the University of Tokyo has suggested that like-minded countries are now forging"multilateral industrial policy" on critical technologies, but asks how they can manage competition
among themselves.
More broadly and perhaps more significantly, East Asian countries have different perceptions of
the role or importance of national security in economic security. The United States, and to a lesser
degree Japan, perceive China to be a geostrategic threat that can be mitigated throughtechnology controls. It is not clear that South Korea and Taiwan agree with this perception or feelthat they have the luxury to impose such controls.
Controls: Can the unilateral become multilateral?
A few days after the Fab 4 meeting, the U.S. Department of Commerce announced new controls
on advanced semiconductor exports to China. The controls are unilateral, and the United Statesis urging its partners and allies to follow suit (not limited to those in Asia). So far, Japan appears
the most receptive to the export control discussion, but has indicated it would prefer not to focus
on the issue. Significantly, Japan and South Korea’s 2019 dispute over export controls on key
chemicals that Japan produces and South Korea relies on to produce semiconductors is stillunresolved. (Dishearteningly, the export control spat over key semiconductors chemicals reduced
South Korea’s reliance on Japan, but increased its dependency on China.)
Previously, on Aug. 15, 2022, the U.S. Department of Commerce implemented export controls on
semiconductor related technologies, but these flowed down from the Wassenaar Arrangement, a
multilateral grouping of 42 participating states.
The new, unilateral Oct. 7 controls on semiconductors, semiconductor manufacturing items, andsoftware to China flowed down in two separate rules. The rules expanded the existing controls toinclude all Chinese destinations for certain advanced chips and chip making equipment. Thereare also new controls on U.S. Persons providing “support” for the development or production ofchips at certain semiconductor-manufacturing facilities in China without a license. Previously,
controls were specific to entities of concern or those engaged. The new controls are for anyone

directly involved in advanced chips, regardless of the use of those advanced chips. It discounts
civil uses of the chips which is more than likely the vast majority of uses for those chips. This lackof targeting on the end use and user is new, and very broad.
According to the press release, “the Department of Commerce briefed and consulted with close
allies and partners on these controls.” Yet as Mi-Yong Kim, former senior Department ofCommerce official, argues, “No other country is going to sign onto this kind of control.” Current
American understanding of Japan’s position and its likelihood of imposing the same export
restrictions on semiconductor and related items to China is probably overly optimistic. Indeed, arecent Nikkei survey indicates that a Taiwan contingency and COVID lockdowns are the primaryreasons Japanese companies are seeking to reduce dependence on Chinese suppliers -- notU.S.-China relations or the security threat China poses to Japan.
Kim notes that the success in that rule will depend on whether other countries will follow suit inimposing similar measures. Multilateralism is key to effective controls, and while the U.S.
government acknowledges as much, it may not be able to achieve consensus. Even the Fab 4
alliance appears to be more fantasy than reality, and it does not go so far as to seek exportrestrictions.
Beyond semiconductors, the United States appears poised to impose similar controls on otherfoundational and emerging technologies in which China is making advancements. Without parallel
efforts from its partners Taiwan and South Korea, plus a heavy dose of support from Japan -- its
staunchest traditional ally and now partner in economic security in Asia -- the United States willlose out on both its technology investments and controls. These countries may not move as
quickly as the United States would like, but its time and resources are better spent working withthem than on making other “down payments.” Balancing technology controls and promotion has
never been an easy task, but it is infinitely easier when one is not going it alone.