South Korea is experiencing a notable productivity increase due to artificial intelligence, making it one of the few economies globally benefiting from this technology. However, analysts from Bank of America caution that rising tensions between the U.S. and China regarding semiconductor industries may pose risks to South Korea’s growth trajectory.
The semiconductor sector represents 17% of South Korea’s exports, with the country enjoying a substantial boost from the AI revolution, reflected in over a 50% year-over-year increase in exports, as outlined in a recent Bank of America Global Research report. The analysts believe that South Korea’s significant investments in AI research and development, alongside a growing array of AI-related patents, will enhance its capabilities and standing in AI utilization in the long run.
Nonetheless, the analysts highlight that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly due to the escalating conflicts between the U.S. and China. Despite South Korea diversifying its chip exports to other regions, more than 30% of its chip exports in 2023 still went to China and Hong Kong, while a similar proportion was sent to the U.S.
The analysts assert that any escalation in geopolitical tensions, especially if the U.S. imposes further trade restrictions on advanced or AI-related chips destined for China, could severely impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruptions in their supply chains due to rising tensions could hinder the ability of South Korean companies to acquire necessary tools for chip production.
Reports indicate that the U.S. has asked South Korea to curtail exports to China of equipment and technology involved in manufacturing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM chips beyond 18-nanometer. South Korean officials are reportedly deliberating the request, considering its implications for major domestic firms like Samsung and SK Hynix, both of which have significant operations in China, the nation’s largest trading partner.
At the same time, the Biden administration is contemplating leveraging an export control mechanism known as the foreign direct product rule against allies who continue to supply chipmaking tools and equipment to China. This rule restricts exports of any products made using a certain percentage of U.S. intellectual property to any country.