South Korea is among the few economies globally experiencing productivity gains from artificial intelligence, but escalating U.S.-China tensions regarding semiconductor supply could hinder this growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has significantly benefited from the AI boom, with exports increasing by over 50% year-on-year. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with an increasing number of AI-related patents, will enhance its capacity for AI adoption in the future.
However, the analysts also caution that geopolitical tensions could impact the semiconductor supply chain, particularly the rising conflicts between the U.S. and China, which may pose challenges to South Korea’s AI advancements. Although South Korea has been working to diversify its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being roughly the same.
Should geopolitical tensions escalate further and the United States impose additional trade restrictions on advanced or AI-related chip exports to China, it could significantly affect South Korea’s memory semiconductor exports, analysts warned.
South Korean chip producers also rely on China for certain components and equipment necessary for chip manufacturing. Disruptions in the supply chain due to rising tensions could complicate the procurement process for South Korean firms, affecting their ability to produce chips.
Reportedly, the U.S. has asked South Korea to limit the export of equipment and technology used to manufacture memory chips and advanced logic chips to China, particularly for those chips with specifications beyond 14-nanometer for logic and beyond 18-nanometer for DRAM memory. South Korean officials are considering this request in light of potential consequences for major companies such as Samsung and SK Hynix, which have operations in China—the country’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating applying an export control called the foreign direct product rule against allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of any goods produced with a specific percentage of U.S. intellectual property components to any country.