Bank of America analysts have noted that South Korea is one of the few economies benefiting from a productivity surge due to artificial intelligence (AI). However, escalating tensions between the U.S. and China over semiconductor issues could pose a threat to this growth.
According to a recent report, the semiconductor sector is crucial to South Korea’s economy, representing 17% of its exports. The country has experienced significant gains from the AI boom, with exports rising over 50% year-over-year. Analysts predict that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will bolster its standing in AI adoption in the long run.
Despite these positives, analysts caution that geopolitical tensions may disrupt the semiconductor supply chain. The ongoing conflict between the U.S. and China is a particular concern, especially as more than 30% of South Korea’s chip exports were directed to China and Hong Kong in 2023. The U.S. is also a significant market for South Korean chips.
The report warns that if the U.S. intensifies trade restrictions on advanced chips and AI-related technologies destined for China, it could severely impact South Korea’s memory chip exports. Additionally, South Korean semiconductor manufacturers rely on China for various components and equipment needed for chip production. Any disruptions in this supply chain could hinder their ability to manufacture chips effectively.
Reports indicate that the Biden administration has requested South Korea to limit its exports to China of equipment and technology essential for producing memory chips and advanced logic chips, particularly those exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer specifications. South Korean officials are reportedly deliberating over this request due to potential impacts on major local companies such as Samsung and SK Hynix, both of which have significant operations in China.
Furthermore, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule, aimed at allies that continue to supply chipmaking tools and equipment to China. This rule stipulates that any goods manufactured with a specified percentage of U.S. intellectual property cannot be exported to any foreign nation.