South Korea is among the few economies benefiting from a productivity increase attributed to artificial intelligence, but the ongoing tensions between the U.S. and China regarding semiconductor technology may pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, with the nation being a significant beneficiary of the AI surge, boasting more than a 50% year-over-year increase in exports, as highlighted in a Global Research report from Bank of America. Analysts believe that South Korea’s robust investment in AI research and development, alongside an increasing number of AI-related patents, will enhance its AI adoption trajectory in the long run.
However, the report warns that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly due to escalating conflicts between the U.S. and China, which could hinder AI growth in South Korea. Although the country has shifted some of its chip exports away from China to other regions, over 30% of South Korean chip exports went to China and Hong Kong in 2023, with exports to the U.S. being comparable.
The analysts stated, “Should geopolitical tensions escalate and the U.S. imposes additional trade restrictions on advanced or AI-related chip exports to China, it could significantly undermine memory semiconductor exports in Korea.”
Moreover, South Korean semiconductor manufacturers rely on China for various chipmaking components and equipment. If geopolitical tensions disrupt supply chains, procurement of necessary tools for chip production could become problematic.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology utilized for producing memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometers and DRAM chips exceeding 18-nanometers. South Korean officials are reportedly contemplating the U.S. request due to potential impacts on major firms like Samsung and SK Hynix, which have operations in China, its largest trading partner.
In a related development, the Biden administration is considering employing an export control mechanism known as the foreign direct product rule on allied nations that continue supplying chipmaking tools and equipment to China. This regulation restricts exports to any country if such goods are produced with a certain proportion of U.S. intellectual property.