South Korea is among the few economies benefiting from increased productivity due to artificial intelligence, but escalating tensions between the U.S. and China regarding semiconductors could pose risks to its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a key beneficiary of the AI surge, with exports rising over 50% year-on-year, as highlighted in a report by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rise in AI-related patents, will further strengthen its position in the adoption of AI technologies in the long run.
However, analysts also cautioned that potential geopolitical conflicts could impact the semiconductor supply chain, particularly due to mounting tensions between the U.S. and China. Although South Korea has begun to diversify its chip exports away from China to other regions, China and Hong Kong made up over 30% of its chip exports in 2023, with similar figures for exports to the U.S.
Bank of America analysts indicated that if geopolitical tensions escalate and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could significantly affect South Korea’s memory semiconductor export sector.
Furthermore, South Korean chip manufacturers rely on China for essential chipmaking components and equipment. Any disruptions in the supply chain due to heightened tensions would create challenges for South Korean companies in acquiring 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 for producing memory chips and advanced logic chips, specifically those that are more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly evaluating this request in light of its potential repercussions for major firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating the implementation of an export control strategy known as the foreign direct product rule, affecting allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any country if they are manufactured using a certain percentage of U.S. intellectual property components.