South Korea stands out as one of the few economies experiencing a productivity surge due to artificial intelligence. However, analysts from Bank of America caution that escalating U.S.-China tensions over semiconductor technology could pose risks to its economic growth.
The semiconductor sector is crucial for South Korea, constituting 17% of its exports. A recent report by Bank of America Global Research highlights that South Korea has emerged as the leading beneficiary of the AI boom, witnessing a remarkable year-over-year export increase of over 50%. The report underscores that the nation’s substantial investment in AI research and development, combined with a rising number of AI-related patents, is expected to bolster its position in AI technology adoption.
Despite these positive indicators, analysts express concern that geopolitical conflicts may impact the semiconductor supply chain, especially in light of the intensifying rivalry between the U.S. and China. While South Korea has successfully diversified its chip exports beyond China, the report notes that China and Hong Kong still accounted for over 30% of its chip exports in 2023, with a similar percentage directed towards the U.S.
The report highlights that any escalation in geopolitical tensions, particularly if the U.S. enforces stricter trade restrictions on advanced or AI-related chip exports to China, could severely affect South Korea’s memory semiconductor exports. Furthermore, South Korean chip manufacturers rely on China for essential components and equipment necessary for chip production. Consequently, any disruption in the supply chain due to rising tensions could pose significant challenges for these manufacturers.
The U.S. has reportedly urged South Korea to limit exports to China of technology and equipment used in the production of memory chips and advanced logic chips, specifically those chips that are more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are deliberating the U.S. request, considering its potential impact on major domestic companies, including Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is contemplating the use of an export control measure known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule could prevent the export of any product to any nation if it incorporates a certain percentage of U.S. intellectual property components.