South Korea stands out as one of the few economies benefiting from a productivity increase driven by artificial intelligence; however, rising U.S.-China tensions over semiconductor exports may pose a threat to its growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has reportedly been a major beneficiary of the AI surge, experiencing a year-over-year export rise of over 50%. Analysts believe that South Korea’s significant investment in AI research and development, along with a growing portfolio of AI-related patents, will enhance its AI adoption in the long run.
Nevertheless, the analysts caution that escalating geopolitical tensions could impact the semiconductor supply chain, particularly due to the increasing friction between the U.S. and China. Despite South Korea’s efforts to diversify its chip exports away from China, the report indicates that over 30% of its chip exports in 2023 were directed to China and Hong Kong, with exports to the U.S. being approximately equivalent.
If U.S. geopolitical tensions escalate and further trade restrictions are imposed on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory chip exports, analysts warn.
Additionally, South Korean semiconductor manufacturers rely on China for certain components and equipment needed for chip production. Disruptions in the supply chain stemming from geopolitical tensions could hinder these firms’ ability to procure essential tools for chip manufacturing.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology necessary for producing memory chips and advanced logic chips, specifically those beyond 14-nanometer processes and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering the U.S. request due to potential repercussions for leading firms like Samsung and SK Hynix, both of which operate in China, South Korea’s largest trading partner.
Simultaneously, the Biden administration is contemplating the application of a foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any goods manufactured with a certain percentage of U.S. intellectual property components to any country.