South Korea stands out as one of the few global economies experiencing a productivity increase attributed to artificial intelligence, yet escalating tensions between the U.S. and China regarding semiconductor chips may hinder its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and it has been significantly bolstered by the AI surge, with exports soaring by over 50% year-on-year, as highlighted in a report from Bank of America Global Research. Looking ahead, the analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will enhance its position in AI integration.
Despite this positive outlook, analysts cautioned that potential geopolitical conflicts could disrupt the semiconductor supply chain, particularly the fraught relationship between the U.S. and China, which poses a risk to AI advancements in South Korea. While the nation has attempted to mitigate its chip export reliance on China by shifting its focus to other regions, it still relied on China and Hong Kong for over 30% of its chip exports in 2023, a figure comparable to its exports to the U.S.
The report indicated that if geopolitical frictions escalate and the U.S. enforces more stringent trade barriers on the export of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers are reliant on China for various chipmaking components and equipment. Disruptions in these supply chains due to heightened tensions could complicate the ability of Korean companies to acquire essential tools for chip production.
Reports suggest that the U.S. has urged South Korea to limit exports of equipment and technology utilized in the production of memory chips and advanced logic chips, specifically those logic chips that surpass 14-nanometer technology and DRAM chips exceeding 18-nanometers. South Korean officials are contemplating this U.S. request, taking into account the potential consequences for major local companies, such as Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In addition, the Biden administration is reportedly looking into implementing an export control mechanism known as the foreign direct product rule on allies that continue to supply semiconductor manufacturing tools to China. This rule would prohibit the export of any goods to any country if they are manufactured using a specified percentage of U.S. intellectual property.