South Korea is experiencing a productivity increase thanks to artificial intelligence, making it one of the few economies globally benefiting from this growth. However, tensions between the U.S. and China over semiconductor technology could pose challenges to South Korea’s expansion, according to analysts at Bank of America.
The semiconductor sector is crucial for South Korea, constituting 17% of the nation’s exports. A report from Bank of America Global Research indicates that South Korea has emerged as a primary beneficiary of the AI surge, with year-over-year exports increasing by over 50%. Analysts believe that ongoing investments in AI research and development, along with a rising number of AI-related patents, will enhance the country’s position in adopting AI technologies in the long run.
Despite these advantages, analysts caution that escalating geopolitical tensions may negatively impact the semiconductor supply chain, particularly the friction between the U.S. and China. Although South Korea has diversified its chip exports away from China to other regions, more than 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar proportion going to the U.S.
Bank of America analysts have warned that if geopolitical tensions worsen and the U.S. imposes new trade restrictions on advanced or AI-related chip exports to China, it could significantly impede South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers require some components and equipment from China for their production processes. Disruptions in supply chains due to rising tensions could hinder these manufacturers’ access to essential tools for chip production.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology vital for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer, as well as DRAM memory chips exceeding 18-nanometer. South Korean officials are considering this request, mindful of its potential effects on major firms like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
In another development, the Biden administration is reportedly contemplating the use of an export control known as the foreign direct product rule against allies that continue to sell chipmaking tools and equipment to China. This rule would prevent the export of any product to any country manufactured with a specific percentage of U.S. intellectual property.