South Korea is experiencing a notable productivity boost from artificial intelligence, setting it apart from many other global economies. However, analysts from Bank of America have warned that escalating U.S.-China tensions over semiconductor trade might pose risks to this growth.
The semiconductor sector is crucial for South Korea, representing 17% of its total exports. A recent report from Bank of America Global Research highlighted that the country has been a significant beneficiary of the AI surge, with exports rising more than 50% compared to the previous year. Analysts are optimistic, predicting that South Korea’s substantial investments in AI research and development, along with an increasing number of AI patents, will enhance its position in the global AI landscape.
Despite this positive outlook, the report cautions that geopolitical issues may affect the semiconductor supply chain, particularly due to the ongoing tensions between the United States and China. Although South Korea has successfully diversified its chip exports away from China to other regions, over 30% of its chip exports still went to China and Hong Kong in 2023, with roughly similar figures for exports to the U.S.
The analysts indicated that if geopolitical friction intensifies and the U.S. imposes stricter trade limitations on advanced semiconductor exports to China, it could severely impact South Korea’s memory chip exports.
Additionally, South Korean semiconductor manufacturers rely on China for some crucial components and equipment needed for chip production. Disruptions in this supply chain could hinder their ability to source necessary production tools.
Reports suggest that the U.S. has requested South Korea to limit its exports of equipment and technology used in the manufacturing of memory chips and advanced logic chips, particularly those chips more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request due to potential implications for major South Korean companies like Samsung and SK Hynix, both of which have operations in China, the country’s largest trading partner.
Furthermore, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule targeting allies that persist in supplying chipmaking tools and equipment to China. This rule would prevent the export of any item produced using a specific percentage of U.S. intellectual property to any country.