South Korea is currently experiencing a productivity increase attributed to artificial intelligence, making it one of the few economies globally to do so. However, analysts from Bank of America caution that escalating tensions between the U.S. and China regarding semiconductor technology might threaten this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has significantly benefited from the AI surge, with exports rising over 50% year-on-year, as reported by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, along with a growing portfolio of AI-related patents, will strengthen its stance in AI adoption in the future.
Nonetheless, the analysts highlighted that geopolitical tensions could impact the semiconductor supply chain, particularly in light of increasing conflicts between the U.S. and China. While South Korea has diversified its chip exports beyond China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar proportion directed to the U.S.
The report indicated that should geopolitical tensions worsen and the U.S. impose further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Thus, any disruptions in the supply chain due to heightened tensions could hinder South Korean companies’ access to essential production tools.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are considering the U.S. request due to potential consequences for major South Korean firms, such as Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
Additionally, the Biden administration is contemplating the application of the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods to any country if they contain a specified percentage of U.S. intellectual property.