South Korea stands out as one of the few economies experiencing a productivity increase due to artificial intelligence, but analysts from Bank of America warn that rising tensions between the U.S. and China over semiconductor chips could hinder its growth.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, with the nation being a key beneficiary of the AI surge, seeing a year-over-year export increase of over 50%. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will strengthen its position in AI adoption in the long run.
Nonetheless, analysts caution that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly the escalating friction between the U.S. and China, which could pose challenges to AI expansion in South Korea. Despite efforts to diversify chip exports away from China, over 30% of South Korea’s chip exports in 2023 went to China and Hong Kong, with a similar proportion sent to the United States.
If the U.S. intensifies trade restrictions on advanced or AI-related chip exports to China, this could severely affect Korea’s memory semiconductor exports, the analysts stated. Moreover, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruptions in the supply chain due to geopolitical tensions could hinder South Korean companies’ access to the necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports of equipment and technology used in the manufacturing of memory chips and advanced logic chips, specifically those surpassing 14-nanometer and 18-nanometer processes. South Korean officials are contemplatively weighing this request, considering its potential impact on major companies like Samsung and SK Hynix, both of which have operations in China, the country’s largest trading partner.
Additionally, the Biden administration is said to be considering implementing an export control measure referred to as the foreign direct product rule against allies that continue supplying chipmaking tools and equipment to China. This rule would prohibit the export of any product to any nation if it is produced using a certain percentage of American intellectual property components.