South Korea is experiencing a productivity increase driven by artificial intelligence, which sets it apart from many other global economies. However, analysts from Bank of America caution that rising U.S.-China tensions concerning semiconductor chips could pose challenges to South Korea’s growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI surge, with exports rising more than 50% on a year-over-year basis, according to a report by Bank of America Global Research. Analysts believe that sustained heavy investment in AI research and development, alongside a growing number of AI-related patents, will further bolster South Korea’s position in AI integration over the long term.
Despite these promising indicators, analysts warn that geopolitical tensions could impact the semiconductor supply chain, particularly with the ongoing strife between the U.S. and China. Although South Korea has begun diversifying its chip exports beyond China to other regions, over 30% of its chip exports were directed to China and Hong Kong in 2023, with a similar amount headed to the U.S.
Bank of America analysts stated that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory chip exports.
Additionally, South Korean semiconductor manufacturers rely on China for certain chipmaking components and equipment. Disruptions in this supply chain could hinder these manufacturers’ ability to obtain the necessary tools for production.
Reports suggest that the U.S. has requested South Korea to limit exports to China of specific equipment and technology used to produce memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean officials are reportedly considering the U.S. request due to potential impacts on major domestic firms, like Samsung and SK Hynix, which operate within China, its largest trading partner.
Simultaneously, the Biden administration is exploring the use of an export control mechanism known as the foreign direct product rule aimed at allies that continue supplying chipmaking tools and equipment to China. This rule restricts the export of any product to any nation if it contains a certain percentage of U.S.-made intellectual property components.