South Korea is experiencing a productivity increase driven by artificial intelligence, making it one of the few economies benefiting from this trend. However, analysts from Bank of America highlight that escalating U.S.-China tensions over semiconductor components could pose risks to the country’s growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports rising over 50% compared to last year, as noted in a Bank of America Global Research report. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI implementation moving forward.
Nevertheless, the report warns that potential geopolitical conflicts could impact the supply chain for semiconductors, particularly due to growing tensions between the U.S. and China. Although South Korea has sought to diversify its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with the U.S. receiving a similar proportion of exports.
If geopolitical strains worsen and the U.S. imposes additional trade restrictions on advanced or AI-related chip exports to China, analysts suggest it could severely impact South Korea’s memory semiconductor exports. Moreover, South Korean chip manufacturers rely on China for various components and machinery needed for chip production. Disruptions in this supply chain could hinder their ability to manufacture chips effectively.
Reports indicate that the U.S. has requested South Korea to limit exports to China of technology and equipment for producing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request due to potential effects on major corporations such as Samsung and SK Hynix, both of which operate in China, the country’s largest trading partner.
In addition, the Biden administration is contemplating the use of an export control measure known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any products derived from a certain percentage of U.S. intellectual property to any nation.