South Korea is experiencing a notable productivity increase attributed to artificial intelligence, but analysts from Bank of America have warned that escalating tensions between the U.S. and China regarding semiconductor technology could hinder its growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a major player in the AI surge, with exports rising by over 50% year-over-year, according to a report from Bank of America Global Research. Analysts believe the country’s substantial investment in AI research and development and a rising number of AI-related patents will enhance South Korea’s position in AI integration over the long term.
However, potential geopolitical conflicts could impact the semiconductor supply chain, particularly in light of the ongoing U.S.-China tensions, which could present challenges to South Korea’s AI expansion. Although South Korea has begun diversifying its chip exports away from China to other regions, more than 30% of its chip exports were still directed to China and Hong Kong in 2023, with exports to the U.S. being approximately equal.
Analysts warned that if geopolitical tensions intensify and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Any disruption in these supply chains due to heightened tensions could complicate efforts for South Korean companies to obtain the necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those beyond the 14-nanometer and 18-nanometer processes. South Korean officials are currently evaluating this request due to the potential impact on major domestic companies such as Samsung and SK Hynix, both of which have significant operations in China, its largest trading partner.
Additionally, the Biden administration is considering implementing an export control policy, known as the foreign direct product rule, on allies that continue to provide semiconductor manufacturing tools and equipment to China. This rule restricts the export of any goods manufactured with a specified percentage of U.S. intellectual property content to any country.