South Korea is experiencing a notable productivity increase linked to artificial intelligence, distinguishing it from many other economies. However, analysts from Bank of America have pointed out that rising tensions between the U.S. and China over semiconductors could hinder this growth.
The semiconductor sector represents 17% of South Korea’s exports, and according to a report by Bank of America Global Research, the nation has emerged as the leading beneficiary of the AI boom, with exports rising over 50% year-on-year. Analysts expect that South Korea’s significant investments in AI research and development, coupled with a surge in AI-related patents, will enhance its position as a leader in AI adoption.
Nonetheless, potential geopolitical conflicts could disrupt the semiconductor supply chain, especially the escalating tensions between the U.S. and China. Although South Korea has shifted its chip exports away from China to other regions, data from the report reveals that over 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being approximately equal.
Bank of America analysts warned that if geopolitical tensions increase and the U.S. enforces additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruptions in the supply chain due to rising tensions could complicate their access to the necessary tools for manufacturing semiconductors.
Recent reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly deliberating the U.S. request, considering the possible consequences for major firms like Samsung and SK Hynix, which have operations in China, its largest trading partner.
In the meantime, the Biden administration is also contemplating the application of an export control known as the foreign direct product rule on allies that persist in supplying chipmaking tools and equipment to China. This rule stipulates that goods cannot be exported to any country if they are manufactured with a certain percentage of U.S. intellectual property components.