South Korea is among the few economies globally experiencing a productivity increase driven by artificial intelligence, but tensions between the U.S. and China regarding semiconductor technology may pose a threat to this growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, with the country being the largest beneficiary of the AI surge, which has seen exports rise by more than 50% year-over-year, as detailed in a report from Bank of America Global Research. Analysts believe that South Korea’s significant investments in AI research and development and a growing number of AI-related patents will bolster its position in AI adoption over the long term.
Nevertheless, the analysts cautioned that “potential geopolitical tensions could impact the semiconductor supply chain,” particularly due to escalating friction between the U.S. and China, which could challenge AI growth in South Korea. Although the country has begun to diversify its chip exports beyond China 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. at a similar level.
“Should geopolitical tensions intensify and the U.S. implement further trade restrictions on advanced or AI-related chip exports to China, it could significantly harm South Korea’s memory semiconductor exports,” warned Bank of America’s analysts.
Moreover, South Korean chipmakers rely on China for certain chip manufacturing components and equipment. Any disruption in the supply chain due to rising tensions would make it increasingly difficult for South Korean companies to acquire the necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports of equipment and technology essential for producing memory chips and advanced logic chips to China, particularly those manufactured using processes more advanced than 14-nanometer for logic chips and over 18-nanometer for DRAM memory chips. South Korean officials are considering this request, taking into account the potential consequences for major South Korean firms like Samsung and SK Hynix, which have substantial operations in China, the country’s largest trading partner.
In response, the Biden administration is reportedly contemplating an export control measure known as the foreign direct product rule for allies that continue to supply chip-making tools and equipment to China. This rule prohibits the export of goods to any country if those goods incorporate a specific percentage of U.S. intellectual property components.