South Korea is emerging as one of the few economies globally experiencing a productivity increase driven by artificial intelligence; however, rising tensions between the U.S. and China regarding semiconductor technology may pose challenges to its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s total exports, and the nation has reportedly been the largest beneficiary of the AI market boom, with exports increasing by over 50% year-on-year. Bank of America Global Research anticipates that South Korea’s significant investments in AI research and development, combined with a growing number of AI-related patents, will further enhance its position in AI adoption.
Nonetheless, the analysts caution that potential geopolitical conflicts could impact the semiconductor supply chain, particularly the escalating issues between the U.S. and China. Despite South Korea’s efforts to diversify its chip exports away from China towards other regions, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with exports to the U.S. being approximately the same.
If geopolitical tensions intensify and the United States imposes further trade restrictions on advanced or AI-related chip exports to China, this could significantly harm South Korea’s memory semiconductor exports, the analysts warn.
Additionally, South Korean chip manufacturers rely on China for specific chip-making components and equipment. Disruptions in this supply chain could hinder South Korean companies’ ability to acquire necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used to manufacture memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly considering the U.S. request due to potential consequences for major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Meanwhile, the Biden administration is considering implementing an export control known as the foreign direct product rule for allies continuing to supply chip-making tools and equipment to China. This regulation would prohibit the export of any product to any country if it contains a certain percentage of U.S. intellectual property components.