South Korea is witnessing an increase in productivity attributed to artificial intelligence, but analysts at Bank of America caution that rising U.S.-China tensions over semiconductor technology may pose risks to its economic growth.
According to a report from Bank of America Global Research, the semiconductor sector plays a pivotal role in South Korea’s economy, constituting 17% of its exports. The nation has significantly benefited from the AI surge, with exports increasing over 50% year-on-year. Analysts anticipate that South Korea’s substantial investments in AI research and development, coupled with a growing number of AI-related patents, will enhance its standing in AI implementation in the long run.
Nonetheless, the report highlights that “potential geopolitical tensions could weigh on the semis supply chain,” particularly with escalating U.S.-China relations, which could challenge South Korea’s AI progress. While the country has diversified its chip exports away from China, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, a figure similar for exports to the U.S.
The analysts warn that if geopolitical tensions escalate and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for critical chipmaking components and equipment, meaning disruptions in the supply chain could hinder their ability to obtain the necessary tools for production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology essential for fabricating memory chips and advanced logic chips, specifically those exceeding the 14-nanometer and 18-nanometer thresholds. South Korean officials are reportedly deliberating the ramifications of this request, considering the possible impact on major firms such as Samsung and SK Hynix that operate in China, its largest trading partner.
Additionally, the Biden administration is exploring the implementation of an export control mechanism known as the foreign direct product rule. This rule would prevent any goods from being exported to any country if they are manufactured with a specified percentage of U.S. intellectual property components.