According to analysts from Bank of America, South Korea stands out as one of the few economies benefiting from a productivity increase driven by artificial intelligence (AI). However, rising tensions between the U.S. and China concerning semiconductor technology may pose risks to the country’s growth.
The semiconductor sector plays a crucial role in South Korea’s economy, representing 17% of exports. Bank of America’s Global Research report indicates that the nation has reaped significant rewards from the AI surge, with a year-over-year increase of over 50% in exports. Analysts anticipate that South Korea’s substantial investment in AI research and development, along with a growing portfolio of AI-related patents, will enhance the country’s position in terms of AI acceptance in the long run.
Nonetheless, analysts caution that escalating geopolitical tensions could impact the semiconductor supply chain. The ongoing friction between the U.S. and China, in particular, could be a threat to South Korea’s AI growth. Even though South Korea has diversified its chip exports from China to other regions, over 30% of its chip exports in 2023 were still directed towards China and Hong Kong, while exports to the U.S. were comparable.
The report warns that if geopolitical tensions intensify and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, this could significantly affect South Korea’s semiconductor memory exports.
Moreover, South Korean chip manufacturers rely on China for essential components and equipment needed for chip production. Should tensions disrupt the supply chain, it would become increasingly challenging for South Korean companies to acquire the necessary tools for chip manufacturing.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology relevant to memory chips and advanced logic chips. This includes logic chips that are more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are currently deliberating this request, considering the potential impact on major national companies such as Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating implementing an export control known as the foreign direct product rule on allies that continue to supply chip-making tools and equipment to China. This rule would prevent the export of any good to a country if it was manufactured with a specific percentage of U.S. intellectual property components.