South Korea stands out as one of the few economies globally experiencing a productivity increase fueled by artificial intelligence. However, analysts from Bank of America warn that rising tensions between the U.S. and China regarding semiconductor technology could pose challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country is currently reaping significant benefits from the AI surge, with exports increasing by over 50% year-on-year, according to a report from Bank of America Global Research. Analysts project that South Korea’s substantial investments in AI research and development, combined with a growing portfolio of AI-related patents, will enhance its standing in AI adoption in the long run.
Nonetheless, the analysts caution that potential geopolitical conflicts could impact the semiconductor supply chain, particularly due to the escalating U.S.-China tensions. Despite South Korea’s efforts to diversify its chip exports away from China to other regions, China and Hong Kong accounted for more than 30% of its chip exports in 2023, which is roughly equivalent to the exports directed to the U.S.
Should geopolitical tensions escalate further, particularly with the U.S. enforcing additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports, as noted by Bank of America analysts.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment vital for chip production. Any disruptions in the supply chain due to geopolitical conflicts could hinder South Korean companies’ access to the necessary tools for chip fabrication.
The U.S. government has reportedly urged South Korea to limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, specifically targeting those technology beyond 14-nanometer logic chips and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering the U.S. request, mindful of its effects on major companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is contemplating implementing an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This regulation would prevent the export of any product to any nation if it contains a specific percentage of U.S. intellectual property components.