South Korea stands out as one of the few economies globally that is experiencing a productivity surge due to artificial intelligence, according to analysts at Bank of America. However, escalating tensions between the U.S. and China regarding semiconductor technology could pose risks to this growth.
The semiconductor sector significantly impacts South Korea’s economy, representing 17% of the nation’s exports. A report from Bank of America Global Research indicates that South Korea has been the primary beneficiary of the AI boom, with exports soaring by more than 50% compared to the previous year. Analysts believe that the country’s substantial investment in AI research and development, coupled with an increasing number of AI-related patents, will enhance its capabilities in AI integration over time.
Nonetheless, the report cautions that geopolitical tensions could disrupt the semiconductor supply chain, particularly due to rising conflict between the U.S. and China. Despite South Korea’s efforts to diversify its chip exports to other regions, China and Hong Kong accounted for over 30% of its semiconductor exports in 2023, with a similar share directed to the U.S.
Bank of America analysts warn that if U.S.-China tensions escalate further and the U.S. imposes stricter trade regulations on advanced semiconductors or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean semiconductor manufacturers rely on China for several essential chipmaking components and equipment. Any disruption in geopolitical relations could make it challenging for South Korean companies to obtain the necessary tools for chip production.
In response to these challenges, the U.S. has reportedly requested South Korea to limit exports to China of equipment and technology for manufacturing memory and advanced logic chips, specifically those with technology nodes more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are weighing this request, mindful of potential repercussions for major domestic firms like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
Additionally, the Biden administration is considering the implementation of export controls under the foreign direct product rule, targeting allies that continue to provide chipmaking tools and equipment to China. This regulation would prohibit the export of any goods to a country if those goods are produced using a certain proportion of U.S. intellectual property components.