South Korea is experiencing a significant boost in productivity driven by artificial intelligence, positioning itself uniquely among global economies. However, the country faces potential challenges to its growth due to escalating tensions between the U.S. and China concerning semiconductor technology, according to Bank of America analysts.
The semiconductor sector is crucial for South Korea, constituting 17% of the nation’s exports. A recent report from Bank of America Global Research highlighted that South Korea has emerged as the largest beneficiary of the AI surge, with a year-over-year increase in exports exceeding 50%. Analysts maintain that South Korea’s considerable investment in AI research and development, alongside a rising number of AI-related patents, will bolster its role in AI usage moving forward.
Despite these advancements, analysts warn that geopolitical tensions could impact the semiconductor supply chain, particularly due to rising confrontations between the U.S. and China. Although South Korea has diversified its chip exports to other regions, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with exports to the U.S. being comparable.
Analysts from Bank of America cautioned that severe geopolitical strains might lead the U.S. to impose further trade restrictions on advanced or AI-related semiconductor exports to China, which could severely affect South Korea’s memory chip exports.
Furthermore, South Korean chip producers rely on China for some essential components and manufacturing equipment. Disruptions in the supply chain due to geopolitical issues could complicate the ability of South Korean companies to obtain the necessary tools for chip production.
The U.S. has reportedly asked South Korea to limit exports of equipment and technologies used for manufacturing memory and advanced logic chips to China, particularly logic chips that are more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean authorities are considering this request, weighing the potential impacts on major domestic corporations like Samsung and SK Hynix, which operate heavily in China, its largest trading partner.
Additionally, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule. This rule would prevent the export of goods to any nation if they are manufactured using a certain percentage of U.S. intellectual property components, creating further complications for allies that continue to sell chipmaking tools and equipment to China.