South Korea is experiencing a unique surge in productivity driven by artificial intelligence, but analysts from Bank of America indicate that rising tensions between the U.S. and China regarding semiconductor technology could pose challenges for its growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, making it crucial to the economy. The country has emerged as a key beneficiary of the AI boom, witnessing a more than 50% increase in exports year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption over time.
However, the analysts caution that escalating geopolitical tensions could negatively impact the semiconductor supply chain, particularly in light of the ongoing U.S.-China rivalry. Although South Korea has started to broaden its chip export markets beyond China, the report notes that China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, a figure comparable to exports to the U.S.
The analysts pointed out that if geopolitical conflicts intensify and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could heavily impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Consequently, any supply chain disruptions arising from heightened tensions could hinder the ability of South Korean companies to obtain the necessary tools to manufacture chips.
In light of these issues, the U.S. has reportedly requested South Korea to limit its exports to China of equipment and technology for producing memory chips and advanced logic chips, specifically those exceeding 14-nanometer technology and DRAM chips beyond 18-nanometer. South Korean officials are said to be deliberating the U.S. request, considering its potential effects on major South Korean corporations like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Simultaneously, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule on allies that continue to supply China with chipmaking tools and equipment. This rule would prevent the export of any goods to any country if they are manufactured with a specified percentage of U.S. intellectual property.