South Korea is among the few economies worldwide experiencing a productivity increase due to artificial intelligence; however, rising U.S.-China tensions regarding semiconductors could pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as the leading beneficiary of the AI surge, with exports rising over 50% year-over-year, as highlighted in a Bank of America Global Research report. Analysts believe that South Korea’s substantial investment in AI research and development, along with a growing number of AI-related patents, will enhance its position in AI adoption in the long run.
Nonetheless, the report cautions that “potential geopolitical tensions could impact the semiconductor supply chain,” particularly due to the escalating friction between the U.S. and China, which could hinder AI growth in South Korea. While South Korea has begun diversifying its chip exports beyond China, the report states that over 30% of its chip exports in 2023 were directed to China and Hong Kong, with similar figures for exports to the U.S.
Bank of America analysts warned that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on the export of advanced or AI-related chips to China, it could greatly affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Disruptions in this supply chain due to escalating tensions could hinder these companies’ ability to acquire the necessary tools for chip production.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology required for manufacturing memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are considering the U.S. request due to the potential effects on major domestic firms like Samsung and SK Hynix, both of which operate in China, the country’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the implementation of an export control known as the foreign direct product rule on allies that continue supplying chipmaking tools and equipment to China. This rule would prohibit the export of any good to any nation if it incorporates a specified percentage of U.S. intellectual property components in its production.