South Korea stands out as one of the few economies globally benefiting from a productivity increase driven by artificial intelligence. However, according to analysts at Bank of America, rising tensions between the U.S. and China regarding semiconductor chips could hinder the country’s growth.
The semiconductor sector is vital to South Korea’s economy, making up 17% of its total exports. A recent report from Bank of America Global Research indicates that South Korea has significantly profited from the AI surge, with exports rising by over 50% compared to the previous year. Analysts are optimistic about the country’s future, attributing its strong investment in AI research and development and an increasing number of AI-related patents as factors that will enhance its position in AI adoption.
Despite these favorable trends, experts warn that geopolitical issues may impact the semiconductor supply chain, primarily due to the escalating tension between the U.S. and China. Although South Korea has taken steps to diversify its chip exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with similar figures for exports to the U.S.
Analysts at Bank of America caution that if tensions between the U.S. and China worsen and the U.S. imposes further trade restrictions on the export of advanced or AI-related chips to China, this could substantially damage South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Consequently, any disruption in the supply chain due to increased tensions could create challenges in acquiring necessary production tools.
Furthermore, reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology essential for manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly contemplating this request, aware of the potential impact on major domestic companies like Samsung and SK Hynix, which have operations in China, its largest trading partner.
In related news, the Biden administration is considering implementing an export control mechanism known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any product produced using a specified percentage of U.S. intellectual property components to any country.