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Korea passes tax break-driven 'Chips Act' as protectionism fears mount

Plus: Complains criteria for foreign companies to access US funding too strict. It's not a great sign, is it?

South Korea has passed legislation giving tax breaks to its semiconductor companies in a bill being labelled as the "Korean Chips Act." At the same time, the nation's trade minister repeated its complaints that the criteria for Korean companies to access US funding are unpalatable in a possible sign of growing protectionism in the worldwide chip market.

To bump up the level of tax breaks, the Korean National Assembly passed a revision bill to the Restriction of Special Taxation Act. The reductions will be given to companies investing in semiconductor production and other strategic industries in the country.

These tax breaks appear to be largely in line with earlier reports regarding the Korean government’s plans, and will see large corporations such as Samsung Electronics and SK hynix offered tax credits of up to 15 percent on investments into strategic technologies such as semiconductor manufacturing, up from 8 percent previously.

Raising the deduction rate from 8 percent to 15 percent would save some 2.5 trillion won ($1.9 billion) in taxes for the local chip industry, according to The Korea Herald.

For small and medium-sized enterprises, the tax credit rate is set to be raised from 16 percent to 25 percent, in moves designed to bolster domestic investment in key technology sectors.

The move follows the announcement of plans from the Korean government earlier this month to pour cash into several key industries including semiconductors and electric vehicles. As part of those plans, Samsung said it aimed to invest $230 billion over the next 20 years to build five new local semiconductor plants.

South Korea is not the only nation offering such tax breaks. In January, Taiwan – home to semiconductor giant TSMC – passed similar legislation that will allow its domestic chipmakers to turn up to 25 percent of their annual research and development expenses into tax credits, in efforts to ensure the country's continued leadership in chip manufacturing.

The US also passed its CHIPS Act last year, authorizing $52 billion in funding to revitalize semiconductor manufacturing within its borders, while the EU is moving ahead at its own pace with the European Chips Act to unlock €43 billion ($46 billion) to build up capacity and innovation to reduce European reliance on chips supplies from elsewhere.

The danger is that all of this could turn into a subsidy race between nations and regions, a danger judged to be real enough to be among the topics discussed in meetings of the EU-US Trade and Technology Council (TTC), formed to coordinate approaches to global trade, economic, and technology issues between the two.

You can't really rely on the global electronics supply chain anymore

It could also be a sign of growing protectionism in the global chip industry. While US CHIPS Act funding is theoretically open to companies from other countries, Korea’s SK hynix has complained that the process is too onerous, and the country’s trade minister warned that it comes with strings attached, requiring detailed disclosure of key technical and financial information.

Taiwan's TSMC expressed similar concerns, with a spokesperson for the company saying: “There are some conditions that cannot be accepted,” according to Reuters.

Gartner vice president for semiconductors and electronics Richard Gordon told us that he didn’t believe that the new chip subsidies should be seen as protectionism in the traditional sense.

“It’s more about creating an attractive investment environment to compete globally and working towards more national self-sufficiency in key technology supply chains,” he told us.

“But, yes, we are entering a new environment where governments are realizing that they must pay attention to developing policies in these areas rather than relying on the global electronics supply chain to provide a solution,” Gordon added.

IDC Senior Research Director for Europe Andrew Buss agreed, saying “I’d view this as perhaps a bit of protectionism, but much more around encouraging large scale capital investment for the building of cutting edge fabs in the region, to enable a lot more self-sufficiency in the country’s semiconductor and technology industries.”

Earlier this month, retired TSMC founder Morris Chang warned that globalization had effectively ended for the chip industry, because US efforts to contain China were leading to a split in the global supply chain.

"There's no question in my mind that, in the chip sector, globalization is dead. Free trade is not quite that dead, but it's in danger," Chang said. ®

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