South Korea is among the few global economies benefiting from a boost in productivity linked to artificial intelligence, according to analysts at Bank of America. However, tensions between the U.S. and China regarding semiconductor technology may pose a threat to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a major beneficiary of the AI surge, with exports increasing by over 50% year-on-year, as highlighted in a report from Bank of America Global Research. Analysts predict that South Korea’s significant investment in AI research and development, along with an increasing number of AI-related patents, will strengthen its role in AI adoption in the long run.
Nevertheless, analysts caution that geopolitical issues could negatively impact the semiconductor supply chain, particularly the escalating tensions between the U.S. and China, which could challenge AI growth in South Korea. Although South Korea has started to diversify its chip exports away from China, the report notes that China and Hong Kong accounted for over 30% of its chip exports in 2023, with similar figures for exports to the U.S.
Bank of America’s analysts warned that if geopolitical tensions rise and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could considerably harm South Korea’s memory semiconductor export sector.
South Korean chip manufacturers also rely on China for certain components and equipment necessary for chip production. Any disruption to this supply chain could hinder their ability to obtain essential tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology for manufacturing memory and advanced logic chips, particularly those more sophisticated than 14-nanometer for logic chips and beyond 18-nanometer for DRAM memory chips. South Korean authorities are reportedly considering this request due to potential impacts on major firms like Samsung and SK Hynix, both of which have significant operations in China, the nation’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the use of an export control mechanism known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any product to any nation if it incorporates a certain percentage of U.S. intellectual property in its manufacturing.