Will US Measures to Restrict Investment in China Tech Hurt Korea?

On Aug. 9 (local time), the U.S. federal government made a decision to regulate American capital investment in China’s advanced technology sector. This marks an escalation of the economic battle between the U.S. and China, expanding its front from trade and technology to the investment domain. This move is being analyzed as signaling an end of the established principles of the World Trade Organization (WTO), which upholds the freedom of trade, investment, and labor mobility. In essence, it’s seen as an announcement that the traditional WTO framework is undergoing a significant shift.

On the same day, U.S. President Joe Biden issued an executive order regulating American capital, including private equity funds (PEFs) and venture capital, from investing in three key areas in China: advanced semiconductor technology, quantum computing, and artificial intelligence.

This regulation applies to various investment methods, including mergers and acquisitions (M&A), establishment of new corporations (greenfield), and joint investments. However, it excludes investment vehicles such as exchange-traded funds (ETFs) and public offerings from the scope of regulation.

As a result, U.S. companies seeking to invest in Chinese firms operating in these three sectors with a revenue contribution of more than 50 percent will be required to submit their investment plans for mandatory declaration. The regulatory authority, which includes the power to prohibit investments, will be vested in the hands of U.S. Secretary of the Treasury Janet Yellen.

The U.S. intends to announce detailed implementing rules after a 45-day period of public consultation, specifying the level of restriction on investment in advanced technology. This executive order will only apply to new investments and is anticipated to take about a year before it is effectively implemented.

The U.S. has consistently maintained the stance that its regulations on China are aimed at safeguarding national security and have been narrowly targeted to achieve this goal. The recent measures, like previous ones, are viewed as decisions driven by security considerations rather than economic motives. It has been emphasized that these actions are in the realm of “derisking” rather than “decoupling,” indicating a focus on reducing risks rather than complete disengagement from China.

China expressed disappointment and concern, stating that the U.S. had violated the principles of a market economy. A spokesperson for China’s Ministry of Commerce said, “The U.S. has consistently violated the principles of market and fair competition that it has upheld, affecting the normal business decisions of companies.” He also added, “It has disrupted the international economic and trade order and seriously disturbed the security of the global production and supply chain.”

This investment restriction measure will apply to future investments and is limited to individuals or entities that are U.S. citizens or U.S. corporations worldwide. Accordingly, the immediate impact on the domestic industry is generally expected to be limited, according to prevailing observations.

However, the increasing pressure from the U.S. government to encourage allies’ participation in measures against China’s influence raises concerns that South Korea could face pressure to join in some form. NH Investment & Securities researcher Na Jeong-hwan explained, “If the U.S. demands its allies like South Korea also impose investment restrictions on China, it could become a worrisome factor for advanced semiconductor investments aimed at China.”

The U.S. previously took measures in October of last year to effectively ban the export of advanced semiconductor equipment to China. Following this, the Netherlands and Japan joined in, effectively closing off the route of advanced semiconductor equipment from the West to China at its source.

There is also a growing concern that China could take retaliatory measures once again. China recently took action on Aug. 1 by imposing export controls on gallium and germanium, rare metals that are gaining attention as next-generation semiconductor materials, against the U.S. An official from the industry said, “We are closely monitoring the situation and are worried that measures such as further strengthening export controls on semiconductor equipment could be taken.”

In a joint press release issued by the Ministry of Trade, Industry and Energy, the Ministry of Economy and Finance, and the Ministry of Foreign Affairs on the same day, the government stated, “The anticipated impact on domestic industry is expected to be limited. We will thoroughly analyze the impact on our economy and, based on the analysis, plan to submit the government’s and industry’s opinions to the U.S. government as necessary.”

Kim Yang-paeng, a specialist researcher at the Korea Institute for Industrial Economics & Trade, diagnosed the current situation, saying, “This is an opportunity to accelerate the semiconductor cluster projects in Pyeongtaek and Yongin to enhance the domestic semiconductor ecosystem.” Jo Sang-hyeon, the head of the Korea International Trade Association’s Institute for International Trade, said, “While there is concern about potential disruptions in our companies’ local production due to the restrictions on advanced technologies, collaboration between South Korea and the U.S. in advanced technology could help maintain a competitive edge in the technology gap.”