South Korea is experiencing a notable increase in productivity driven by artificial intelligence, standing out among global economies. However, analysts from Bank of America warn that rising tensions between the U.S. and China related to semiconductor technology may pose challenges to this growth.
The semiconductor sector is crucial for South Korea, making up 17% of its exports. According to a report from Bank of America Global Research, South Korea has become a leading beneficiary of the AI surge, with semiconductor exports rising by over 50% in the past year. The report highlights that the country’s substantial investment in AI research and development, alongside a growing portfolio of AI-related patents, is likely to strengthen its position within the AI landscape over time.
Nonetheless, analysts caution that geopolitical issues could impact the semiconductor supply chain, particularly tensions between the U.S. and China. Despite South Korea’s efforts to diversify its chip exports beyond China, over 30% of its chip exports in 2023 were still directed towards China and Hong Kong, with a similar amount going to the U.S.
The report emphasizes that should geopolitical tensions escalate and the U.S. impose further trade restrictions on advanced or AI-related chip exports to China, South Korea’s memory semiconductor exports could suffer significantly.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment needed in chip production. Disruptions in the supply chain due to these tensions could hinder their ability to procure essential tools for manufacturing.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology for producing memory chips and advanced logic chips, specifically targeting chips beyond 14 nanometers and DRAM memory chips exceeding 18 nanometers. South Korean officials are considering this request, mindful of potential impacts on major local companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools to China. This regulation would prohibit the export of any product manufactured with a specified percentage of U.S. intellectual property components to any nation.