South Korea is experiencing a productivity increase due to artificial intelligence, but escalating tensions between the U.S. and China regarding semiconductor technology may pose risks to the nation’s economic growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s total exports, and the country has emerged as a significant beneficiary of the AI surge, with exports growing by over 50% compared to the previous year, as noted in a report from Bank of America Global Research. Analysts believe that South Korea’s substantial investment in AI research and development, alongside a rising number of AI-related patents, will enhance its position in AI utilization over time.
Nonetheless, the analysts warned that geopolitical tensions could strain semiconductor supply chains, particularly due to the increasing friction between the United States and China, which might hinder the progress of AI in South Korea. Although South Korea has worked to diversify its chip exports beyond China, over 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being roughly equivalent.
If geopolitical tensions worsen and the U.S. enacts stricter trade restrictions on exports of advanced or AI-related chips to China, it could have a detrimental impact on South Korea’s memory semiconductor exports, the analysts stated.
Moreover, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Disruptions in this supply chain due to heightened tensions would complicate the ability of South Korean companies to acquire the essential tools for chip manufacturing.
The United States has reportedly requested that South Korea limit its exports to China of equipment and technology utilized in the production of memory and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request, mindful of the potential consequences for major companies like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any product to any country if it incorporates a specified percentage of U.S. intellectual property.