Research

How might semiconductor producers respond to the possibility of restricted access to key imported intermediate goods? And how might this response vary across inputs? I use the response from Korean semiconductor producers amid the 2019 Korea-Japan political dispute to answer these questions. In July 2019, Japan announced potential export controls on South Korea for three key semiconductor inputs, leaving implementation to Japanese officials. Although no export restrictions were applied in practice, the announcement itself triggered uncertainty over the global supply chain, leading to drastically different responses from Korean producers across the three targeted inputs. I present a model featuring two adjustment margins—inventories and global sourcing decisions—with heterogeneity across inputs in the initial share of sourcing from Japan. I show that the calibrated model matches the heterogeneous patterns across the three inputs, suggesting that these two adjustment margins played an important role in practice. Using the model, I also solve for how Korean producers would have responded had Japan extended its export controls to other key semiconductor inputs. These counterfactual responses align with actual responses, indicating that semiconductor producers feared an extension of Japanese export controls.