South Korea is currently one of the few economies globally benefiting from a productivity increase linked to artificial intelligence, but rising tensions between the U.S. and China regarding semiconductor technology may pose risks to this growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and a recent report from Bank of America Global Research indicates that the nation has emerged as a key player in the AI boom, with exports surging more than 50% year-over-year. Analysts are optimistic that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will enhance its role in AI adoption over time.
However, the analysts caution that escalating geopolitical issues could disrupt the semiconductor supply chain, particularly due to the ongoing tensions between the U.S. and China. Despite South Korea’s efforts to diversify chip exports to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being approximately equal.
They warned that if these geopolitical tensions continue to escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports. Furthermore, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruption in this supply chain could hinder their ability to produce chips effectively.
Reportedly, the U.S. has requested South Korea to limit exports to China of equipment and technology required for manufacturing memory chips and advanced logic chips, specifically those surpassing 14-nanometers and 18-nanometers in DRAM memory. South Korean officials are reportedly contemplating the U.S. request, considering potential impacts on major domestic companies like Samsung and SK Hynix, which have substantial operations in China, South Korea’s largest trading partner.
In addition, the Biden administration is reportedly exploring the implementation of an export control measure known as the foreign direct product rule, aimed at allies that are still supplying chipmaking tools and equipment to China. This rule would restrict the export of any goods to any nation if they incorporate a certain percentage of U.S. intellectual property components.