South Korea is among the few economies experiencing a productivity increase due to artificial intelligence, but escalating U.S.-China tensions over semiconductor supplies may threaten this growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, with the country being a leading beneficiary of the AI surge, as reflected in over a 50% year-on-year export growth. The report from Bank of America Global Research indicates that South Korea’s significant investment in AI research and development and an increasing number of AI-related patents are likely to strengthen its position in AI technology adoption in the long run.
However, the report warns that potential geopolitical tensions could impact the supply chain for semiconductors, particularly amid the rising friction between the U.S. and China. Although South Korea has been shifting its chip exports away from China to other regions, over 30% of its chip exports in 2023 headed to China and Hong Kong, with similar amounts directed to the U.S.
Analysts noted that if geopolitical relations worsen and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Furthermore, South Korean chip producers rely on China for certain components and equipment necessary for chip manufacturing. Disruptions in the supply chain due to rising tensions could complicate access to essential production tools for South Korean companies.
Reports have emerged that the U.S. has requested South Korea to limit exports to China of technologies and equipment used for making advanced memory chips and logic chips, particularly those exceeding 14-nanometer and 18-nanometer technologies. South Korean officials are reportedly considering this request, as it could have significant implications for major local firms like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
Additionally, the Biden administration is said to be contemplating the implementation of an export control named the foreign direct product rule against allies that continue to supply chipmaking tools to China. This rule would prohibit the export of goods to any nation if they are produced using a certain proportion of U.S. intellectual property.