Bank of America analysts have reported that South Korea is one of the few global economies experiencing a productivity surge thanks to artificial intelligence. However, they warned that rising tensions between the U.S. and China over semiconductor technology might pose risks to this growth.
The semiconductor sector represents 17% of South Korea’s total exports, and the country has emerged as the leading beneficiary of the AI surge, with year-over-year export increases exceeding 50%. Analysts believe that the substantial investments South Korea is making in AI research and development, coupled with a rising number of AI-related patents, will continue to bolster its AI adoption in the future.
Nonetheless, they caution that geopolitical conflicts could negatively impact the semiconductor supply chain, particularly the increasing friction between the United States and China. Although South Korea has diversified its chip exports to other regions, approximately 30% of its exports still went to China and Hong Kong in 2023, with similar figures for exports to the U.S.
If tensions escalate and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could severely hurt South Korea’s memory semiconductor exports, according to the analysts. Additionally, South Korean semiconductor manufacturers rely on China for certain production components and equipment. Disruptions in the supply chain due to rising tensions could make it difficult for these companies to acquire the necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports of equipment and technology to China specifically for the production of memory chips and advanced logic chips, including those more sophisticated than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request due to potential negative impacts on major firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule against allies that continue to supply chipmaking equipment to China. This rule would prevent any goods from being exported to any country if they are produced using a specified percentage of U.S. intellectual property.