South Korea is experiencing a productivity increase driven by artificial intelligence, but increasing tensions between the U.S. and China regarding semiconductor chips may pose risks to the country’s growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports rising over 50% year-on-year, as outlined in a report from Bank of America Global Research. The analysts predict that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will enhance its role in AI adoption in the future.
Nonetheless, the analysts noted that geopolitical tensions could impact the semiconductor supply chain. The ongoing friction between the U.S. and China may present challenges to South Korea’s AI growth. Despite diversifying its chip exports beyond China to other regions, China and Hong Kong accounted for more than 30% of South Korea’s chip exports in 2023, which is similar for exports to the U.S.
The report warns that if geopolitical strains escalate, and the U.S. enforces more trade restrictions on the export of advanced or AI-related chips to China, it could significantly harm Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruptions in this supply chain could hinder the ability of these firms to source the necessary tools for manufacturing chips.
Reports indicate that the U.S. has requested South Korea to limit exports to China of technology and equipment used for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering the U.S. request due to potential consequences for major domestic companies, including Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating implementing an export control known as the foreign direct product rule against allies that continue supplying chipmaking tools and equipment to China. This rule would prevent any goods from being exported to any country if they are manufactured with a certain percentage of U.S. intellectual property components.