South Korea stands out as one of the few economies worldwide experiencing a productivity surge thanks to artificial intelligence, according to analysts at Bank of America. However, rising tensions between the U.S. and China surrounding semiconductor technology pose potential risks to this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and recent findings from Bank of America Global Research indicate that the nation has benefited significantly from the AI boom, with exports increasing by over 50% compared to the previous year. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its standing in AI utilization in the long run.
Nevertheless, the analysts caution that escalating geopolitical issues could compromise the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China. While South Korea has managed to diversify its semiconductor exports away from China, the report reveals that in 2023, China and Hong Kong accounted for over 30% of its chip exports, with sales to the U.S. at a similar level.
“Should geopolitical tensions escalate and the U.S. impose further restrictions on trade related to advanced or AI-integrated chip exports to China, it could severely impact Korea’s memory semiconductor exports,” Bank of America analysts noted.
South Korean semiconductor manufacturers also rely on China for various components and equipment essential for chip production. Consequently, any disruptions to this supply chain due to heightened tensions could hinder these firms’ ability to acquire necessary tools for chip fabrication.
The U.S. government has reportedly requested that South Korea limit exports to China of equipment and technology crucial for the manufacturing of advanced memory chips and logic chips, particularly those with specifications beyond 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating this request, mindful of the implications it could have for major firms such as Samsung and SK Hynix, both of which have significant operations in China, South Korea’s largest trading partner.
In related developments, the Biden administration is considering implementing an export control known as the foreign direct product rule, which would restrict allies from supplying chipmaking tools and equipment to China. This regulation would prevent the export of any goods to a country if they are produced using a certain proportion of U.S. intellectual property components.