South Korea is experiencing a notable productivity boost from artificial intelligence, making it one of the few economies worldwide to do so. However, tensions between the U.S. and China over semiconductor technology could present challenges to this growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI boom, with exports increasing by over 50% compared to the previous year. Analysts from Bank of America Global Research believe that South Korea’s substantial investments in AI research and development, along with a rise in AI-related patents, will further enhance the nation’s position in AI technology.
Nonetheless, the analysts warn that escalating geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain and hinder South Korea’s AI growth. Despite efforts to diversify chip exports away from China, it remains that over 30% of its semiconductor exports went to China and Hong Kong in 2023, with similar figures for exports to the U.S.
The analysts caution that if tensions rise further and the U.S. imposes additional trade restrictions on advanced or AI-related semiconductor exports to China, it could harm South Korea’s memory chip exports significantly.
Additionally, South Korean semiconductor manufacturers rely on China for various components and equipment needed for chip production. Thus, any disruption in the supply chain due to geopolitical tensions could complicate sourcing essential production tools.
Reports indicate that the U.S. has requested South Korea to limit exports to China of technology used for fabricating memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM chips beyond 18-nanometer. South Korean officials are contemplating this U.S. request in light of potential repercussions for major firms like Samsung and SK Hynix, which maintain operations in China, South Korea’s largest trading partner.
At the same time, the Biden administration is considering implementing an export control known as the foreign direct product rule, targeting allies that continue to sell semiconductor manufacturing tools and equipment to China. This rule would restrict exports to any country if goods are produced using a substantial amount of U.S. intellectual property components.