South Korea is experiencing a notable productivity increase thanks to artificial intelligence, but the country’s growth may be threatened by rising U.S.-China tensions over semiconductor technology, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, with the country being identified as a major beneficiary of the AI surge, which has led to over a 50% increase in exports compared to the previous year, as highlighted in a Bank of America Global Research report. Analysts predict that South Korea’s significant investments in AI research and development, alongside an increase in AI-related patents, will enhance its position in AI integration over the long term.
However, analysts caution that potential geopolitical issues could negatively impact the semiconductor supply chain, especially amid escalating tensions between the U.S. and China. Despite South Korea’s efforts to diversify chip exports away from China, over 30% of its semiconductor exports in 2023 were directed to China and Hong Kong, which parallels the percentage of exports to the U.S.
The analysts warned that if U.S.-China tensions escalate further and the U.S. enforces additional trade restrictions on advanced or AI-related chip exports to China, it could have a detrimental effect on Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Any disruption in this supply chain could hinder South Korean companies’ ability to source the essential tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports to China of technology and equipment pertinent to the production of memory chips and advanced logic chips, specifically those exceeding specifications of 14-nanometer for logic chips and 18-nanometer for DRAM. South Korean officials are reportedly evaluating this request due to potential impacts on major companies such as Samsung and SK Hynix, which have substantial operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the application of an export control measure known as the foreign direct product rule, directed at allies that continue to provide chipmaking tools and equipment to China. This rule prohibits the export of any item to any nation if it has been produced using a specific percentage of U.S. intellectual property components.