South Korea stands out as one of the few economies globally experiencing a productivity increase driven by artificial intelligence. However, analysts from Bank of America caution that escalating U.S.-China tensions regarding semiconductor technology may pose significant threats to this growth.
The semiconductor sector plays a crucial role in South Korea’s economy, constituting 17% of its total exports. A Bank of America Global Research report highlights that South Korea has emerged as the primary beneficiary of the AI boom, with its exports soaring by over 50% compared to the previous year. The analysts express optimism about South Korea’s substantial investments in AI research and development, which, along with an increasing number of AI patents, are expected to strengthen the nation’s position in AI integration.
Despite this positive outlook, potential geopolitical tensions could disturb the semiconductor supply chain, particularly as frictions between the U.S. and China intensify. Although South Korea has managed to diversify its chip exports beyond China to other regions, over 30% of its chip exports in 2023 were directed towards China and Hong Kong. Exports to the U.S. accounted for a similar percentage.
Anaysts warned that if U.S.-China relations worsen and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, this could severely impact South Korean memory chip exports.
Moreover, South Korean chip manufacturers rely on China for essential components and equipment needed for chip production. Any disruptions in the supply chain due to heightened tensions could complicate access to necessary tools for these firms.
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, particularly those using technology more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are currently deliberating this request, considering its potential implications for major companies like Samsung and SK Hynix, which have significant operations in China—South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule. This regulation would prevent any goods from being exported to any country if they contain a certain percentage of U.S. intellectual property components, particularly affecting allies that continue to supply chipmaking tools and equipment to China.