According to Bank of America analysts, South Korea stands out as one of the few economies benefiting from a productivity increase attributed to artificial intelligence. However, they caution that escalating U.S.-China tensions over semiconductors could hinder this growth.
Recent reports indicate that the semiconductor sector constitutes 17% of South Korea’s exports. The country has experienced significant gains from the AI boom, with exports surging over 50% year-over-year. Analysts predict that South Korea’s robust investment in AI research and development, coupled with a rising number of AI-related patents, will bolster its position in AI adoption over the long term.
Nonetheless, the analysts warn that geopolitical issues could negatively impact the semiconductor supply chain, particularly the escalating tensions between the United States and China. While South Korea has made efforts to diversify its chip exports beyond China, over 30% of its chip exports in 2023 still went to China and Hong Kong, matching the amount exported to the U.S.
The analysts highlighted that further escalation in geopolitical tensions, particularly if the U.S. were to impose additional trade restrictions on advanced or AI-related chip exports to China, could have severe consequences for South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain manufacturing components and equipment. Should tensions disrupt the supply chain, securing the necessary tools for chip production could become increasingly challenging for these firms.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering the U.S. request in light of potential impacts on major South Korean companies, such as Samsung and SK Hynix, which have operations in China, its largest trading partner.
Furthermore, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule against allies that continue to provide chipmaking tools and equipment to China. This rule would prohibit the export of any goods made using a certain percentage of U.S. intellectual property components to any country.