South Korea has emerged as one of the few economies globally benefiting from a productivity increase linked to artificial intelligence (AI). However, analysts from Bank of America caution that rising tensions between the U.S. and China over semiconductor technology could hinder this growth.
The semiconductor sector represents 17% of South Korea’s exports, and according to a Bank of America Global Research report, the nation has “been the largest beneficiary of the AI boom, with exports increasing by over 50% year-over-year.” Analysts believe that South Korea’s significant investment in AI research and development, along with a growing portfolio of AI-related patents, will further enhance its capabilities in AI adoption in the long run.
Yet, potential geopolitical tensions might impact the semiconductor supply chain, particularly due to the escalating conflict between the U.S. and China. Despite South Korea diversifying its chip exports away from China, data shows that in 2023, China and Hong Kong accounted for over 30% of its chip exports, with similar figures for exports to the U.S.
Bank of America analysts stated that should tensions rise and the U.S. impose further trade restrictions on advanced or AI-related chip exports to China, it could deal a significant blow to South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential chipmaking components and equipment. Disruptions in the supply chain could hinder their ability to acquire the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit its exports to China of equipment and technology used in creating memory chips and advanced logic chips, particularly those exceeding 14-nanometers in technology and DRAM chips beyond 18-nanometers. South Korean authorities are reportedly contemplating this request due to potential impacts on major companies such as Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is said to be considering applying an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any product to any nation if it is manufactured with a specified percentage of U.S. intellectual property.