South Korea stands out as one of the few economies worldwide experiencing a productivity increase attributed to artificial intelligence (AI). However, analysts at Bank of America warn that escalating tensions between the U.S. and China regarding semiconductor chips could pose a significant challenge to this growth.
The semiconductor sector plays a crucial role in South Korea’s economy, representing 17% of its exports. A recent report by Bank of America Global Research shows that South Korea has been a primary beneficiary of the AI boom, with chip exports rising over 50% year-over-year. Looking ahead, analysts believe that South Korea’s substantial investments in AI research and development, along with a growing quantity of AI-related patents, will bolster its progress in AI adoption.
Despite this positive outlook, analysts caution that potential geopolitical tensions could impact the semiconductor supply chain, particularly the increasing friction between the U.S. and China, which poses risks to South Korea’s AI growth. Although South Korea has made efforts to diversify its chip exports away from China, more than 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. accounting for a similar share.
If tensions escalate further and the U.S. imposes additional trade barriers on advanced or AI-related chip exports to China, it could severely hinder South Korea’s memory semiconductor exports, analysts noted.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Thus, any disruption in the supply chain due to rising tensions would complicate the ability of South Korean companies to acquire the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to curb exports to China of equipment and technology utilized in manufacturing memory chips and advanced logic chips, specifically those with capabilities beyond 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly contemplating this request amid concerns over potential repercussions for major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Meanwhile, the Biden administration is said to be evaluating the possibility of employing an export control measure known as the foreign direct product rule against allies who continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any country if those goods are produced using a specified percentage of U.S. intellectual property.