South Korea is emerging as one of the few economies experiencing a productivity boost from artificial intelligence, but rising U.S.-China tensions over semiconductor technology could pose risks to its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as the largest beneficiary of the AI boom, with export figures increasing by more than 50% year-over-year. Analysts predict that South Korea’s robust investment in AI research and development, along with a growing number of AI-related patents, will enhance its role in AI adoption in the long run.
However, the report warns that escalating geopolitical tensions could impact the semiconductor supply chain, particularly concerning the ongoing friction between the U.S. and China. Despite South Korea’s efforts to diversify its chip exports away from China, over 30% of its semiconductor exports still went to China and Hong Kong in 2023.
Should tensions deteriorate further and the U.S. impose additional trade restrictions on advanced or AI-related semiconductor exports to China, analysts argue it could severely impact South Korea’s memory chip export market.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to geopolitical conflicts would complicate the ability of South Korean companies to acquire essential tools for manufacturing chips.
The U.S. has reportedly requested that South Korea implement restrictions on exports of equipment and technology utilized in the production of memory chips and advanced logic chips, particularly those with advancements beyond 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, mindful of potential impacts on major firms such as Samsung and SK Hynix, both of which have operations in China—their largest trading partner.
Simultaneously, the Biden administration is reportedly looking into using an export control measure known as the foreign direct product rule against allies that continue to sell chip manufacturing tools to China. This regulation would prohibit the export of any items produced using a specific percentage of U.S. intellectual property to any country.