South Korea stands out as one of the few economies globally experiencing a productivity increase driven by artificial intelligence. However, analysts from Bank of America caution that escalating tensions between the U.S. and China over semiconductor technology could pose a threat to its growth.
The semiconductor sector represents 17% of South Korea’s exports, and according to a Bank of America Global Research report, the nation has reaped substantial benefits from the AI surge, with exports rising over 50% compared to the previous year. The report highlights that South Korea’s significant investments in AI research and development, coupled with a growing portfolio of AI-related patents, will likely enhance its role in AI adoption in the future.
Nevertheless, the analysts noted that potential geopolitical conflicts might pressure the semiconductor supply chain, particularly concerning the rising U.S.-China tensions. Although South Korea has made strides to diversify its chip exports beyond China, over 30% of its chip exports still went to China and Hong Kong in 2023. Exports to the U.S. were similar.
Bank of America analysts warned that if geopolitical tensions escalate and the U.S. enacts further 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 producers rely on China for essential components and equipment for chip manufacturing. Disruptions in the supply chain due to heightened tensions could hinder South Korean companies’ access to the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology used for producing memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean officials are reportedly considering the U.S. request, weighing its potential impact on major domestic firms such as Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control known as the foreign direct product rule on allies that continue selling chipmaking technologies and tools to China. This rule prohibits the export of goods to any nation if they are manufactured using a specified amount of U.S. intellectual property components.