South Korea stands out as one of the few global economies experiencing a productivity surge due to artificial intelligence, but rising tensions between the U.S. and China regarding semiconductors could hinder its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a major winner from the AI boom, with exports increasing by over 50% year over year, as highlighted in a report from Bank of America Global Research. Analysts are optimistic about South Korea’s significant investments in AI research and development, along with a growing number of AI-related patents, which they believe will enhance the country’s position in AI adoption in the long run.
Nonetheless, the report cautions that potential geopolitical conflicts could impact the semiconductor supply chain, especially amid escalating U.S.-China tensions, which may pose challenges for AI development in South Korea. Despite efforts to diversify chip exports away from China to other regions, over 30% of South Korea’s chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being similar in volume.
Bank of America analysts warned that if geopolitical tensions escalate further and the U.S. imposes stricter trade restrictions on the export of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers are reliant on China for certain chipmaking components and equipment. Disruptions in this supply chain due to rising tensions could complicate the production of chips for these companies.
Currently, the U.S. has requested South Korea to limit exports to China of machinery and technology essential for producing advanced memory and logic chips, specifically those more sophisticated than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean authorities are reportedly considering this request, taking into account the potential repercussions for major South Korean firms like Samsung and SK Hynix, which operate in China, its largest trading partner.
The Biden administration is also contemplating the use of an export control measure known as the foreign direct product rule, targeting 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 certain proportion of U.S. intellectual property components.