South Korea is among the few economies globally experiencing a productivity increase due to artificial intelligence (AI), but analysts at Bank of America warn that rising U.S.-China tensions over semiconductor technology could threaten this growth.
According to a Bank of America Global Research report, the semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as a key benefactor of the AI surge, with exports rising by over 50% year-on-year. The report emphasizes that South Korea’s substantial investments in AI research and development and its increasing number of AI-related patents are likely to bolster its position in the AI landscape in the long run.
However, the analysts caution that ongoing geopolitical tensions could impact the semiconductor supply chain, particularly due to escalating conflicts between the U.S. and China. Although South Korea has begun diversifying its chip exports beyond China, over 30% of its chip exports in 2023 were directed to China and Hong Kong, mirroring exports to the U.S.
The analysts noted that if U.S.-China tensions intensify and the U.S. imposes further trade restrictions on advanced AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment, which means supply chain disruptions could hinder their ability to produce semiconductors.
The United States has reportedly urged South Korea to limit exports to China of equipment and technology essential for manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are contemplating the U.S. request due to potential ramifications for major firms like Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
Simultaneously, the Biden administration is considering applying an export rule known as the foreign direct product rule to allies that persist in supplying chipmaking tools and equipment to China. This regulation would prevent the export of goods produced with a specific percentage of U.S. intellectual property components to any country.