South Korea is experiencing one of the few productivity boosts from artificial intelligence globally, but rising tensions between the U.S. and China regarding semiconductor technology could hinder its growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has been a major beneficiary of the AI surge, with exports rising over 50% year-over-year, as indicated in a report from Bank of America Global Research. Analysts believe that South Korea’s significant investment in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption in the long run.
Nevertheless, the potential for geopolitical tensions poses risks to the semiconductor supply chain. Specifically, the escalating conflict between the U.S. and China could present challenges to AI growth in South Korea. Although the country has begun to diversify its chip exports away from China to other regions, more than 30% of its chip exports in 2023 were still directed towards China and Hong Kong. Exports to the U.S. accounted for a similar percentage.
According to Bank of America analysts, if geopolitical tensions intensify and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Should geopolitical tensions disrupt the supply chain, it would complicate the ability of South Korean companies to obtain the necessary tools for chip production.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are reportedly considering the U.S. request due to potential repercussions on major companies like Samsung and SK Hynix, both of which have operations in China, its largest trading partner.
In parallel, the Biden administration is reportedly contemplating the application of an export control known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This rule prohibits the export of goods to any country if they are produced with a certain percentage of U.S. intellectual property components.