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Daily Archives: August 14, 2022

Charts: National Association of Realtors Housing Affordability Index

Source : National Association of Realtors

Chart: U.S. Federal Debt and Interest Rate

Source : FRED

Humour: News in Cartoons

Chip 4 Is About More than Korea – It’s About Breaking Up Taiwan’s Monopoly

Kim Young-bae wrote . . . . . . . . .

South Korea’s intention to join Chip 4 has already been conveyed to the US, with a preliminary meeting poised to take place within the month

“At the heart of the problem is Taiwan.”

Earlier this month, when speculation and controversy were rampant over the US-led push to form the so-called “Chip 4” pact, an official working in the semiconductor industry told the Hankyoreh that, while the US is trying to embrace Taiwan, “China is opposing this.”

Their view was thus that, instead of trying to figure out or focus on whether South Korea will join Chip 4, we should be looking at Taiwan as the actual central factor in this debate.

According to the official, if South Korea is now standing at a crossroads of technology (the US) and markets (China), then the answer should “obviously” be technology. The reason for this, the official explains, is because technology is needed first in order to produce products that can be sold in markets.

In reality, South Korea’s participation in Chip 4 — a microchip supply chain consultative group led by the US which includes South Korea, Japan and Taiwan — is essentially already a done deal.

According to reports on Monday, South Korea’s intention to join Chip 4 has already been conveyed to the US and a preliminary meeting, which is considered the starting point for discussions to fully establish the body, will be held at the end of this month or by early next month.

When asked about South Korea’s participation in the tech pact on his way to his office on Monday, President Yoon Suk-yeol told reporters there is nothing to be concerned about. “We will carefully examine and discuss with relevant ministries and agencies to protect our national interests,” Yoon said.

Meanwhile, a report published last month by the Korea Institute for Industrial Economics and Trade (KIET) also supports the argument that Taiwan is indeed the keyword when it comes to Chip 4.

“Some are raising the possibility and risks of Korea’s global chip alliance being alienating,” the report, titled “The Change of Semiconductor Geopolitics and Korea’s Path,” stated.

“But on the other hand, the West’s perception of the threats to Taiwan’s security is very serious,” the report continued, adding that the true objective of the US and European Union is to reduce mid to long-term dependence on Taiwan and increase their own share in the semiconductor industry.

As such, according to KIET’s analysis, companies and leaders in semiconductor industries in both the US and EU are heavily focused on reducing their dependence on Asia. At the center of this, then, is to “break away from Taiwan’s market monopoly” when it comes to semiconductors.

“Due to China’s public insistence on unification by force [with Taiwan] and the Ukraine crisis, the West is feeling a serious sense of crisis [considering the possibility] of this major industry being hit by a devastating blow if the supply of leading edge and mature semiconductors is blocked off at the same time as a Chinese annexation of Taiwan,” the report read.

This is based on the ways the US and EU have been supporting their semiconductor industries and the remarks of key figures.

A good illustration of this is the US Department of Commerce 2022-2026 Strategic Plan, which was published back in March. According to this plan, the number one goal for the US was to strengthen its domestic manufacturing and supply chains and the main strategy to achieve this is by beefing up its domestic leading-edge semiconductor capabilities.
Similarly, major officials from the US and EU have also been warning about the risks of being overly dependent on Taiwan.

For example, US Commerce Secretary Gina Raimondo said in an interview in May that US “dependence on Taiwan for chips is untenable and unsafe.”

Similarly, European Commission President Ursula von der Leyen said in a video address to the World Economic Forum the same month that the dependence and uncertainty associated with importing semiconductors from a concentrated number of foreign companies is “unacceptable.”

Although “embracing” Taiwan and “breaking out” of the Taiwanese semiconductor monopoly seem to be on opposite sides of the spectrum, when looked at in terms of short and long-term goals, things begin to make more sense.

Since it’s difficult for the US to establish itself as a major chip manufacturing base in the short-term, it is choosing to first work together with its allies in Northeast Asia and, like this, move forward by strengthening its own domestic chip manufacturing capabilities in the long-term.

Regarding the US move to increase cooperation with Northeast Asian partners such as Taiwan, particularly centered on the establishment of Chip 4, KIET states, “In the face of poor manufacturing capacity, [the US] is approaching [Northeast Asia] for the purpose of stabilizing supply and demand in the short term to minimize damage to the demand industry [in the US] caused by [possible] future supply chain shocks.”

Lee Jun, a senior researcher at KIET, said in a phone call with the Hankyoreh, “We do not know everything about the US, but it is true that [they] are very concerned about the geopolitical instability in Taiwan.”

Lee continued to explain that the US will slowly use a “fading out” strategy to reduce its dependence on Taiwan over time, while having South Korea as its primary alternative to disperse any possible associated risks. The “ultimate” goal, however, is for the US to have as many semiconductor manufacturing bases as possible in its own country, Lee says.

Washington is expected to adopt this gradual strategy since it will likely take a considerable amount of time to fully establish itself as a semiconductor manufacturing base.

Therefore, Chip 4 is considered an opportunity for South Korea in the short term. Because Korea, as the world’s only alternative in terms of technological competitiveness, has no choice but to step up and be the next best option for the US and EU, who, due to their various concerns, are seeking to diversify supply chains for high value chips.
In the long run, however, South Korea’s semiconductor industry will also likely be negatively impacted by the US and EU’s attempts to reduce their dependence on Asia.

“Around 2025, the competitive environment of Korea’s semiconductor industry is expected to deteriorate mainly due to the risk of oversupply,” the KIET report reads. “Uncertainties in the global economy and semiconductor demand industry are also increasing.”

Currently, the US dominates the global semiconductor market with design-specialized companies (fabless) such as Qualcomm and Nvidia, while Japan is unrivaled when it comes to semiconductor materials and parts.

However, when it comes to semiconductor consignment manufacturing (foundry), Taiwan’s TSMC is the undisputed top dog.
Propelled largely by Samsung Electronics, South Korea has risen to become one of the world’s leaders in memory semiconductors, and it ranks second only to Taiwan in the foundry area.

The origins of Chip 4 lie in the US’ vision of reining in China through stronger semiconductor cooperation with Japan, South Korea, and Taiwan. Because of that, some analysts have interpreted it as a kind of economic and security “alliance” meant to shut China out of supply chains. This is also the reason some have been predicting possible economic retaliation from China along the same lines as its response to South Korea’s deployment of a Terminal High Altitude Area Defense (THAAD) anti-missile system.

Speaking about Chip 4 with reporters Monday at the Central Government Complex in Sejong, Minister of Trade, Industry and Energy Lee Chang-yang said the matter would be “decided purely on the basis of economic interests.”
“We have no intention of excluding China or any other specific country, or creating a group that is closed off to others,” he stressed.

Commenting on the possibility of South Korea’s participation in Chip 4 triggering diplomatic retaliation from Beijing, Lee said, “While I can’t speak about the specifics, I think that likelihood will depend on the content, level, and methods of Chip 4.”

“We intend to present our own views on what the best direction is at the Chip 4 preliminary meeting,” he added.
An official with the Ministry of Trade, Industry and Energy said, “The idea of Chip 4 being an ‘alliance’ is a nickname mistakenly applied by the media, which is both inappropriate and excessive.”

“The main parties actually participating are companies like Samsung Electronics and TSMC, which are in a relationship of competition. How can speak of that as being ‘forming an alliance?’” they asked.

“An alliance is about excluding other places [countries], and when it comes to semiconductors, there’s no possibility of decoupling from China [as the largest market],” they added, adding that Chip 4 should “properly be viewed as a consultative body or dialogue channel to ensure supply chain stability.”

Source : Hankyoreh

Read also at The Korea Times

Why Beijing won’t retaliate against Seoul for ‘Chip 4’ . . . . .

Future Smart Homes Could be Powered with Electronics Built on Stones

What if you could power the smart thermostats, speakers and lights in your home with a kitchen countertop? Stones, such as marble and granite, are natural, eco-friendly materials that many people building or renovating houses already use. Now, in a step toward integrating energy storage with these materials, researchers have fabricated microsupercapacitors onto the surface of stone tiles. The devices, reported in ACS Nano, are durable and easily scaled up for customizable 3D power supplies.

It would be convenient if the surfaces in rooms could charge smart home devices or other small electronics without being connected to the electrical grid. And although stone is a widely used material for floors, countertops and decorative backsplashes, it hasn’t been integrated with energy storage devices, such as batteries and capacitors. But stones, even those that are polished and seem smooth, have microscopic bumps and divots, making it difficult to adhere electrical components to them. Researchers have recently figured out how to place microsupercapacitors, which have fast charging and discharging rates and excellent power supply storage, onto irregular surfaces with lasers. So, Bongchul Kang and colleagues wanted to adapt this approach to build microsupercapacitors on marble.

The researchers patterned a copper oxide nanoparticle solution on a marble tile into two comb-like sides whose prongs were interspersed. They pointed a near-infrared laser on the nanoparticles, producing pure copper electrodes that were porous, highly conductive and strongly attached to the stone’s surface. To form the microsupercapacitor, the researchers deposited iron oxide onto one of the electrodes to form a cathode, and manganese oxide on the other to form an anode. The electrolyte layer connecting the electrodes was made from a lithium perchlorate and polymer solution. In tests, the device maintained a high energy storage capacity even after 4,000 charge-discharge cycles. When multiple microenergy devices were strung together in a three-by-three array, enough energy was stored to light an LED. In addition, the stone energy storage devices were exceptionally durable against harsh impacts and could be quickly recycled. The researchers say that stone microenergy devices could provide high-performance, customizable and conveniently accessible power from natural building materials.

Source : American Chemical Society

Hong Kong Population Drops by Record as People Flee Covid Curbs

Kari Lindberg wrote . . . . . . . . .

Hong Kong’s population dropped by a record as people fled strict Covid-19 restrictions that have hobbled the city as most other regions move on from the pandemic.

The city saw a decline of 121,500 residents in the year ended June 30, leaving the population at about 7.29 million, according to government data released Thursday. That means the population fell 1.6%, marking the third straight year of declines and the biggest drop in at least six decades. A wide-reaching national security law may have also been a contributing factor.

Amid the “continued impact of Covid-19, stringent border control and quarantine measures have been in place in Hong Kong, the Mainland and other places around the world, resulting in severe interruption of cross-boundary travel,” a government spokesperson said in a statement accompanying the data, adding that the inflow of people into Hong Kong has “remained at a low level.”

Hong Kong — which saw its population swell in the post-war era amid waves of mass migration from the mainland — has only seen a few instances of decline since 1961. The overall population shrank by 0.2% amid an outbreak of severe acute respiratory syndrome and protests against an earlier security law in the 2002-03 period, for instance.

However, recent declines have swelled amid the city’s tight pandemic controls.

Former Chief Executive Carrie Lam implemented some of the city’s stringent social distancing measures of the pandemic during the last year and threatened to mass test all residents, with anyone infected facing isolation in government camps. The mass testing plan never materialized, but people still fled the city as it enacted flight bans on countries including the US and the UK, and as fears that families could be separated in quarantine grew.

Hong Kong has since lifted many of its restrictions, but a three-day hotel quarantine requirement for arrivals still isolates the city from much of the world.

The city’s campaign against dissent following Beijing’s imposition of a security law in June 2020, which raised questions about the “one country, two systems” framework that underpins the former British colony’s financial center, could have also contributed to the population decline.

Hong Kong authorities have increasingly used a wide array of tools beyond the security law to restrict the rights of Hong Kongers. At least 30 individuals have been arrested for inciting or publishing seditious text or materials. Earlier this year, a court handed a 40-month prison sentence to the first person convicted under a colonial-era sedition law since the handover to China — a sign authorities intend to dish out stiff punishments for critical speech as part of a broader political crackdown.

Some Hong Kong residents with foreign passports or those with overseas have sought to relocate recently — especially to the UK, which opened up a pathway to citizenship for holders of British National (Overseas) passports.

Source : BNN Bloomberg

Source : SCMP

Interview: Understanding China’s Global Value Chains

Paul French wrote . . . . . . . . .

On a surface level, it’s a well-known story: over the last quarter century, China has emerged as the world’s largest exporting nation with more than £1.4 trillion GBP of exports annually. But now we have enough case studies and data to dig deeper. In his new book, Decoding China’s Export Miracle, Yuqing Xing, of the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, uses China’s involvement with global value chains (GVCs) to analyse this export miracle.

The book explains how China’s deep integration with GVCs has been a decisive factor in the country’s emergence as the world’s number one exporting nation and the champion of high-technology exports. It uses a range of case studies including Apple, Uniqlo, Dyson, Samsung and others that use China to become ‘factoryless manufacturers.’

In this interview, Paul French catches up with Yuxing Qing to find out why China and GVCs are so important.

To understand your book and its arguments we need to first talk about global value chains (GVCs). What are they and why have they been so important to China’s rise as the world’s major exporter nation?

Global value chains are a new model of manufacturing and trading goods internationally. A typical GVC involves firms from various nations. Those firms coordinately perform a series of tasks necessary for the delivery of products to end-users in the global market. These tasks include research and development, product design, the manufacture of parts and components, assembly, distribution and retailing. Chinese firms participating in GVCs mainly perform manufacturing tasks, such as assembly. Most manufactured goods exported by China, which account for more than 90% of total Chinese exports, are, in fact, produced and traded along GVCs, which have systematically eliminated conventional entry barriers to international markets for made/assembled in China products. This has greatly facilitated the massive penetration of Chinese goods into the markets of both developed and developing countries – powering China’s export miracle.

You also argue that China has been able to take advantage of the ‘spillover effects from GVCs.’ What are these? And how was China able to take advantage?

GVCs offer positive spillover effects to non-leading firms, particularly firms from developing countries. One spillover effect comes from brands owned by lead firms. By plugging into value chains as contract manufacturers, Chinese firms have sold their products under internationally recognised brands, which clearly enhances the appeal of made in China products to foreign consumers and has strengthened their international competitiveness.

The second spillover effect is the technology and product innovation of lead firms. The production of any high-tech products requires not only core technological components but also low-tech and standard parts and labour-intensive services (like assembly). By manufacturing those low-tech parts and providing assembly services, Chinese firms have been able to join the value creation processes of high-tech products and take advantage of the fast-growing worldwide demand for high-tech products such as laptops and mobile phones. For example, China’s export of iPhones is attributed to its participation in the iPhone value chain as an assembler.

The third spillover effect of GVCs is related to the distribution and retail networks established by GVC lead firms. As suppliers of foreign MNCs, Chinese products are sold through the global distribution and retail networks established GVC lead firms. The continuous expansion of those networks automatically increases the access of made in China products and thus boosts China’s exports. This is actually how 50,000 Walmart suppliers in China have entered international markets and raised their sales abroad.

You also argue that Chinese firms participating in GVCs offered an alternative path by which China could achieve industrialisation, a kind of turbocharging of the economic learning curve. How did this work?

GVCs are based on production fragmentation. With the extensive fragmentation of the manufacturing industry resulting from modularisation, it is no longer necessary for a country to build production capacities for an entire industry in order to produce finished products. By participating in GVCs, Chinese firms have developed and expanded their production capacities where they have a comparative advantage, and they have been growing together with the lead firms of GVCs through the aforementioned three spillover effects.

In addition, GVCs give Chinese firms a unique channel through which to access new knowledge and production know-how. The learning opportunities within GVCs include face-to-face interaction, knowledge transfer from lead firms, pressure to adopt international standards, and training of the local workforce by lead firms. That learning facilitates Chinese firms’ industrial upgrading and innovation activities, such as adding value to products, moving up from pure assembly to design work, and increasing production process efficiency. For example, all of Apple’s suppliers need to meet high standards set by Apple and engage intensive communication with Apple, all of which facilitate the innovation and productivity growth of non-lead firms. Those unique features constitute a new path of industrialisation.

GVCs give Chinese firms a unique channel through which to access new knowledge and production know-how.

I think it is also interesting that you argue Chinese firms have managed to achieve ‘nonlinear upgrading’ through their participation in GVCs. What do you mean by this exactly?

Specialising in low value-added tasks has opened a door for Chinese firms to integrate themselves into GVCs. It is the beginning of the long march from entry into GVCs to participation in higher value-added segments, to capturing more added value, and ultimately evolving into a GVC lead firm. Upgrading along GVCs from low value-added to high value-added tasks constitutes a linear model of innovation. For example, a firm starts from assembling mobile phones, then enters the manufacturing of components, and eventually produces mobile phones under its own brand. This is a sequential upgrading along value chains, I call it a linear path of innovation.

On the other hand, before developing core technology capacities such as operating systems design and mobile chipset production, Chinese original brand manufacturers such as Huawei, Xiaomi and Oppo leapt forward to brand development by sourcing core technology from foreign suppliers like Google, Qualcomm, Samsung and Sony. This is non-linear innovation. Sourced foreign technologies enable Chinese brand mobile phones to compete with the likes of Samsung and Apple. Taking advantage of the availability of standardised technology platforms, those Chinese firms have concentrated on incremental innovations and marketing, and successfully broken the monopoly of foreign rivals in both domestic and international markets. The nonlinear innovation path reflects the flexibility of the GVC strategy for catch-up by developing countries.

How does China’s integration within GVCs affect delicate trade negotiations, especially where, as with the US, Australia and EU, they have become quite problematic?

China’s huge trade surplus with a few trading partners has given rise to trade friction. I think China should further lower tariff and non-tariff barriers to increase the access of foreign goods and services to its domestic market and encourage Chinese consumers to embrace products made beyond China.

Having said that, I would like to emphasise that current trade statistics are incompatible with value chain trade. China’s trade surplus has been exaggerated, because (1) foreign value-added has been counted as China’s value-added, and (2) trade statistics cannot trace actual exports of factory-less manufacturers, such as Apple, Nike, Dyson, and H&M to China. The first reason causes the inflation of China’s exports to those countries, while the second underestimates those countries’ exports to China. I explain how trade statistics distort the bilateral trade balance between China and the US in detail in chapter 4 of the book.

China is deeply integrated with GVCs organised by MNCs from the US, Japan, and the EU. This is why I use the term “China-centred” GVCs in the book: Any tariff and non-tariff measures imposed on made/assembled in China goods would harm not only Chinese firms, but also MNCs who outsource billions of dollars of goods from China. Trade wars or sanctions are a double-edged sword. Communications, negotiations and compromises are the right approaches to work out any trade frictions and reach win-win solutions. I think China’s trade friction with Australia is purely a result of geopolitical tensions. As an economist, I do not think it is wise to use trade policies to serve non-economic objectives.

We’ve heard so much in recent years about China’s economic rebalancing – away from exports and towards domestic consumption. What is the future for China’s export sectors in the next, say, 5-10 years?

Rebalancing has been a buzzword since the global financial crisis. China’s rebalancing from an exports-driven to domestic consumption-driven model has been expected. Firstly, the contribution of export growth to the growth of the Chinese economy has fallen substantially. Secondly, China’s imports increased from $1.1 to 2.1 trillion, almost doubling from 2008 to 2018. We have to realise that this transition is easier said than done. It requires a structural change on the supply side of the Chinese economy, which is more difficult than a simplistic macroeconomic analysis on the rebalancing, as it requires thousands of Chinese firms producing shoes, apparel, toys, mobile phones or laptop computers to either scale down their outputs or producing something else that is in demand from Chinese consumers. Again, many MNCs from the US, EU and Japan do not export products manufactured in their home countries to China. Instead, they sell products either assembled/made in China or third countries, which produce either in-China or third-country sales in China. Those sales are not counted as exports to China, thus underestimating China’s actual imports from those nations.

The ongoing US-China trade war, and the possible technological decoupling between the two nations, has been reshaping GVCs involvement, which may undermine China’s export capacity, particularly when it comes to serving the US market. As a result of the Covid-19 pandemic, some politicians in the US, EU and Japan have called for improving self-sufficiency in essential medical supplies. This may limit the growth potential of Chinese exports. However, for a nation with $2.5 trillion annual exports, internal circulation is impossible. The entrenched exported-economic structure implies that international markets will remain a critical source of income and employment and the Chinese government will continue to support its firms to expand in the global market through trade negotiations.

Source : China-Britain Business Council