South Korea's Take on the European Chips Act is Bitter-Sweet
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South Korea's Take on the European Chips Act is Bitter-Sweet

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Similar to how oil drove the industrial economy of the previous century, semiconductors are now the fuel powering the data-driven economies as the globe advances in the digital era. The same falls true for South Korea, as its semiconductor market has been sending waves to various industries, luxury products, including consumers particularly the MZ Generation. In fact, a Gartner’s report indicated that the country’s semiconductor market accounted for around 19.3 percent of the global market.

Seeing how significant the sector is for its contribution to national security and economy, South Korea introduced state support programs to bolster the chip supply chain. Recently, the European Commission proposed the European Chips Act and the country perceives it as an opportunity that can attract investment for its local suppliers. Although the act is yet to pass as approval is still pending, the country’s industry experts have already expressed their say on it and what it can do to the chip sector.

An Opportunity for Local Parts Suppliers

By drawing investment into the industry, the European Chips Act plans to provide opportunity to the South Korean manufacturers. Also, the EU interprets that through the act, the bloc’s share of global chip production could increase double fold. Consequently, it has agreed to pass the 43 billion euro 9$ 47 billion), in hopes to increase the country’s current nine percent to 20 percent by 2020.

However, the Minsitry of Trade, Industry and Energy interpreted that the act could have minimal effect on the country’s chipmakers since local companies do not have production facilities in Europe. Even the production facilities in the European region are not operated by Korean companies at present. Moreover, the EU’s Chips Act does not particularly state any clause that discriminates against companies outside its region, which makes it more unlikely to have a direct impact on South Korea.

But the ministry did observe that the Act could help expand the production facilities in the European region and that could lead to an increase in export opportunities for local component and equipment suppliers.

The EU intends to use the funds for public and private investment under the proposed law to expand its chip design capability and research and development.

However, the facilities would have to be first-of-their-kind in the EU. The money would also be used to provide subsidies for businesses that intend to construct production facilities in Europe. The bloc also wants to implement a framework for managing crises and monitoring its chip supply chain.

Also, the industry ministry of South Korea announced that it would get in touch with the country's chip manufacturers, to closely follow the EU's legislative process, and assess any potential effects the European act would have on Korean businesses to develop appropriate countermeasures.

On the other hand, the US also passed the CHIPS Act last year, approving $52 billion in funding to resurrect domestic semiconductor manufacturing. But the country perceived that this act could not provide a smooth track for its sector to steer clear and here’s why.

Indigenous Tax Incentives Provision for the Semiconductor Industry

In a possible indication of rising protectionism in the global chip market, the country's trade minister repeated complaints that the requirements for Korean companies to access US funding are unfavorable. Therefore, to provide tax incentives to its semiconductor industries, South Korea created the Korean Chips Act.

Besides that the Korean National Assembly sought to revise the passed down the Restriction of Special Taxation Act to increase the degree of tax reductions. Companies making investments in the nation's critical industries, such as semiconductor manufacture, will receive the reductions.

These tax breaks have been observed by the large corporations like Samsung Electronics and SK Hynix offering tax credits of up to 15 percent on investments into strategic technologies like semiconductor manufacturing, up from eight percent previously. The Tax breaks also seem to be largely in line with earlier reports regarding the Korean government's plans.

The tax breaks are observed to be encouraging domestic investment in important technology industries and the tax credit rate for small and medium-sized businesses are also expected to increase from 16 to 25 percent.

 

Unfortunately, the bill was met with criticism as it disappointed politicians from the two main parties, the industry, and academia due to less-than-expected advantages.

Revision of the Bill

Initially, the bill was intended to boost tax incentives to promote growth in high-tech industries like semiconductors, biopharmaceuticals, and electric car batteries. 

But upon inspecting the limited advantages of the bill, four associations that represent the regional semiconductor sector and the committee's non-political members asked the National Assembly to rethink the passed bill that amends the Restriction of Special Taxation Act.

Some from the academia and business community voiced out that it would be preferable to veto the bill than to pass it.

While others disagreed, and argued that as a nation entering a global chip war, the expansion of investment and tax credits should be viewed from a global viewpoint. Due to the minimal tax credits, it would be difficult to develop a strong semiconductor industry.

Bills related to the K-chips act that would streamline the licensing procedure and improve professional training are also losing ground. The act's initial changes included increasing the amount of applicants approved for majors in semiconductor-related fields. 

That section of the bill was left out during negotiations for causing regional strife as the policy would benefit universities in the greater Seoul area more than others. As part of the agreed-upon student numbers, the bill was adjusted to reflect the number of students admitted to the respective majors.

The academic community has vehemently criticized the issue, contending that the legislators are blind to the wider picture and are allowing the semiconductor industry's future potential to be constrained by current regional conflicts.

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