South Korea is emerging as one of the few countries experiencing a productivity increase attributed to artificial intelligence, but analysts at Bank of America have noted that escalating tensions between the U.S. and China over semiconductor technology may threaten this growth.
The semiconductor industry represents 17% of South Korea’s exports, and according to a Bank of America Global Research report, the nation has significantly benefited from the AI boom, witnessing export growth of over 50% year-on-year. Analysts believe that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will enhance its leadership in AI technology adoption.
However, the report also warns that geopolitical conflicts could impact the semiconductor supply chain, particularly with the increasing friction between the U.S. and China. Although South Korea has begun to diversify its chip exports away from China, over 30% of its semiconductor exports were to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar percentage.
If tensions between the U.S. and China escalate, and if the U.S. imposes further trade restrictions on advanced or AI-related semiconductor exports to China, it could severely impact South Korea’s memory chip exports, analysts cautioned.
Additionally, South Korean semiconductor manufacturers rely on China for certain components and equipment necessary for chip production. Disruption in the supply chain could hinder these firms’ ability to source the essential tools needed for chip manufacturing.
Furthermore, reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology involved in manufacturing advanced memory chips and logic chips, particularly those more sophisticated than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean officials are reportedly considering this request due to potential impacts on major domestic companies, including Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
On another front, the Biden administration is reportedly evaluating the implementation of an export control mechanism known as the foreign direct product rule against allies that continue to sell chip-making tools and equipment to China. This rule would prohibit the export of any goods made with a specified percentage of U.S. intellectual property components to any country.