The South Korea-Japan Trade Dispute in Context: Semiconductor Manufacturing, Chemicals, and Concentrated Supply Chains

Abstract

The semiconductor production supply chain is among the most globally integrated. Japan’s recently announced export control actions have introduced supply chain risks for semiconductor and electronics manufacturers, particularly in Japan and Korea. This paper provides context and examines the potential implications of such risks. We identify the factors behind Japan’s competitiveness in the semiconductor materials and equipment industries, focusing on specialized chemicals, and South Korea’s competitiveness in semiconductor manufacturing. We explore the short and long-term implications of sustained supply chain risks for this particular supply chain and find that there are strong supplier-customer relationships between materials and equipment suppliers and semiconductor manufacturers, due to specialization and high fixed costs throughout the supply chain. In the short-term, Japanese chemical providers and Korean semiconductor producers face potential disruptions in their production and exports, though the magnitude of potential losses for Korean chipmakers are likely much larger than Japanese chemicals suppliers. In the long-term, these actions create incentives for Korean chipmakers to significantly lessen their sourcing from Japanese suppliers, not only in specialized chemicals, but throughout the entire semiconductor supply chain.