South Korea is one of the few economies globally experiencing a productivity increase due to artificial intelligence, although analysts from Bank of America warn that escalating U.S.-China tensions over semiconductor technology could hinder growth.
According to a Bank of America Global Research report, the semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a leading beneficiary of the AI surge, with exports rising over 50% year-on-year. Analysts believe that the country’s substantial investments in AI research and development, coupled with an increasing number of AI-related patents, will further enhance its position in AI adoption.
However, the analysts caution that potential geopolitical conflicts could impact the semiconductor supply chain, particularly regarding the escalating tensions between the U.S. and China, which could pose challenges to AI growth in South Korea. While South Korea has started to diversify its chip exports away from China, the report indicates that over 30% of its chip exports went to China and Hong Kong in 2023, with similar percentages going to the U.S.
If geopolitical tensions escalate and the U.S. enacts additional trade restrictions on the export of advanced or AI-related chips to China, this could severely affect South Korea’s memory semiconductor exports, according to Bank of America analysts.
Additionally, South Korean chip manufacturers rely on China for various components and equipment essential for chip production. Any disruption in the supply chain due to tensions could complicate the procurement of necessary tools for South Korean firms.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, specifically those technologies that exceed 14-nanometer and 18-nanometer specifications. South Korean officials are reportedly considering this request, being mindful of the potential impact on major national companies like Samsung and SK Hynix, which have substantial operations in China, the country’s largest trading partner.
In parallel, the Biden administration is contemplating the use of an export control measure, known as the foreign direct product rule, targeting allies that continue to sell chipmaking equipment and technology to China. This rule prevents the export of goods produced with a certain percentage of U.S. intellectual property components to any country.