South Korea is one of the few economies globally experiencing a productivity increase due to artificial intelligence. However, analysts from Bank of America warn that ongoing tensions between the U.S. and China regarding semiconductor chips could pose significant challenges to this growth.
The semiconductor sector plays a crucial role in South Korea’s economy, accounting for 17% of its exports. A report from Bank of America Global Research noted that the nation has emerged as the top beneficiary of the AI industry, with exports surging over 50% year-over-year. Analysts believe that South Korea’s substantial investment in AI research and development, alongside a rising number of AI-related patents, will strengthen its position in AI adoption in the long run.
Despite these positive signs, analysts warned that potential geopolitical conflicts could impact the semiconductor supply chain—most notably the escalating tensions between the U.S. and China. The report indicated that while South Korea has successfully diversified its chip exports from China to other regions, in 2023, over 30% of its chip exports still went to China and Hong Kong, with a similar proportion directed towards the U.S.
Bank of America analysts stated that if geopolitical tensions escalate and the U.S. implements additional trade restrictions on the export of advanced or AI-related chips to China, it could severely harm South Korea’s memory chip exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Any disruptions in the supply chain due to rising tensions could hinder their ability to acquire essential tools for chip manufacturing.
The U.S. has reportedly urged South Korea to limit exports to China of tools and technology used in creating advanced memory chips and logic chips, particularly those exceeding 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are said to be deliberating this request, considering its potential impact on major domestic companies like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
At the same time, the Biden administration is reportedly contemplating the use of an export control measure known as the foreign direct product rule against allies that continue to sell chipmaking tools and equipment to China. This rule prohibits the export of any product to any country if it contains a certain percentage of U.S. intellectual property components.