South Korea is experiencing growth in productivity attributed to artificial intelligence, standing out among global economies. However, analysts from Bank of America have noted that escalating tensions between the U.S. and China regarding semiconductor technology could pose a major hurdle to this growth.
According to a report by Bank of America Global Research, the semiconductor sector comprises 17% of South Korea’s exports, with the nation being a key benefactor of the AI surge, evidenced by a year-over-year export increase of more than 50%. The report highlights that South Korea’s substantial investments in AI research and development and an increase in AI-related patents are likely to enhance its role in the adoption of AI technologies in the future.
Despite these positive prospects, analysts caution that geopolitical tensions, particularly between the U.S. and China, may impact the semiconductor supply chain negatively. While South Korea has attempted to diversify its chip export markets away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar percentage directed toward the U.S.
The analysts warn that if geopolitical tensions intensify, resulting in the U.S. imposing stricter trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory chip exports. Additionally, South Korean semiconductor producers rely on Chinese suppliers for certain components and equipment essential for chip manufacturing. Disruptions in these supply chains could hinder their ability to produce chips efficiently.
Furthermore, the U.S. has reportedly requested that South Korea restrict exports to China of equipment and technology necessary for manufacturing advanced memory chips and logic chips, particularly those that exceed 14-nanometer and 18-nanometer processing capabilities, respectively. South Korean officials are considering this request, mindful of the potential implications for major firms like Samsung and SK Hynix that have operations in China, the country’s largest trading partner.
Compounding the situation, the Biden administration is reportedly contemplating using an export control named the foreign direct product rule, aimed at allies that continue to provide chipmaking technologies to China. This rule would prevent the export of any goods to any nation if they contain a specified percentage of U.S. intellectual property components.