South Korea is one of the few economies worldwide experiencing productivity growth due to artificial intelligence (AI), but heightened U.S.-China tensions over semiconductor technology may pose challenges to its advancement, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s total exports, and the nation has emerged as a key beneficiary from the AI surge, with exports increasing by over 50% year-on-year, as outlined in a report by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, alongside a rising number of AI-related patents, will enhance its capacity for AI integration in the long run.
Despite these advantages, analysts cautioned that “potential geopolitical tensions could burden the semiconductor supply chain,” particularly the escalating conflict between the U.S. and China, which could hinder AI progress in South Korea. Although South Korea has shifted some of its chip exports away from China to other regions, over 30% of its semiconductor exports in 2023 were still directed to China and Hong Kong.
The analysts added, “If geopolitical tensions intensify and the U.S. enacts further trade restrictions on the export of advanced or AI-related chips to China, it could heavily impact Korea’s memory semiconductor exports.”
Moreover, South Korean chip manufacturers are reliant on China for several components and equipment essential for chip production. Any disruption in the supply chain resulting from escalating tensions could complicate the procurement of necessary manufacturing tools.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology utilized in the production of memory chips and advanced logic chips, particularly those more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are reportedly considering the U.S. request, given the potential repercussions for major South Korean corporations, such as Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
Simultaneously, the Biden administration is contemplating the application of an export control policy known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any product to any nation if it incorporates a specified percentage of U.S. intellectual property.