South Korea is distinguished as one of the few economies globally experiencing a rise in productivity due to artificial intelligence, although escalating tensions between the U.S. and China concerning semiconductors could pose significant hurdles to its growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s total exports, and the nation has emerged as the primary beneficiary of the AI surge, with exports increasing by over 50% year-on-year, as per a report from Bank of America Global Research. The analysts predict that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will continue to enhance its standing in AI adoption in the long run.
Nevertheless, the analysts caution that potential geopolitical tensions might exert pressure on the semiconductor supply chain, particularly in light of the deteriorating relations between the U.S. and China, which could hinder AI growth in South Korea. Despite efforts to diversify chip exports beyond China to other regions, China and Hong Kong accounted for more than 30% of South Korea’s chip exports in 2023, matching exports to the U.S.
Should geopolitical tensions escalate, particularly if the U.S. enacts additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports, the analysts warned.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Thus, any disruption in this supply chain due to heightened tensions would complicate matters for South Korean firms in obtaining the required tools for manufacturing.
Reports indicate that the U.S. has requested South Korea to impose restrictions on exports to China of both equipment and technology utilized in producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering the U.S. call, taking into account the potential impact on major domestic firms such as Samsung and SK Hynix, which have operations in China, their largest trading partner.
In parallel, the Biden administration is reportedly evaluating the application of an export control known as the foreign direct product rule on allies that persist in supplying chipmaking tools and equipment to China. This regulation prohibits the export of any product to any nation if it is manufactured using a specific percentage of U.S. intellectual property components.