South Korea is experiencing a productivity increase attributed to artificial intelligence, making it one of the few economies benefiting from the AI surge. However, analysts from Bank of America have warned that escalating tensions between the U.S. and China regarding semiconductor technology could pose risks to South Korea’s growth.
The semiconductor sector is crucial for South Korea, accounting for 17% of the nation’s exports. A recent report from Bank of America Global Research highlighted that South Korea has notably thrived in the AI landscape, with exports increasing by over 50% year-on-year. The report emphasized that ongoing investments in AI research and development, along with a rise in AI-related patents, are expected to enhance South Korea’s standing in AI integration.
Nevertheless, analysts cautioned that geopolitical issues, particularly the conflict between the U.S. and China, could negatively impact the semiconductor supply chain, which is vital for AI advancement in South Korea. Although South Korea has begun diversifying its chip exports away from China, over 30% of its chip exports in 2023 were sent to China and Hong Kong, with a similar figure for exports to the U.S.
Bank of America analysts noted that further escalation of geopolitical tensions, such as the U.S. implementing additional trade restrictions on advanced or AI-related chip exports to China, could severely affect South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers are reliant on China for key components and equipment used in chip production. Any supply chain disruptions due to rising tensions could complicate access for South Korean companies to the necessary tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports of specific equipment and technologies to China for the production of advanced memory chips and logic chips, particularly those exceeding 14-nanometer and DRAM chips over 18-nanometer. South Korean officials are reportedly considering this request, mindful of the potential impact on major corporations like Samsung and SK Hynix that have operations in China, South Korea’s largest trading partner.
In addition, the Biden administration is contemplating applying a foreign direct product rule on allied nations that continue exporting chipmaking tools to China. This regulation would prevent the export of any products containing a specified percentage of U.S. intellectual property to any country.