South Korea stands out as one of the few global economies experiencing a productivity surge linked to artificial intelligence. However, Bank of America analysts warn that escalating tensions between the U.S. and China regarding semiconductor chips could pose risks to this growth.
The semiconductor sector significantly impacts South Korea’s economy, comprising 17% of its total exports. According to a report from Bank of America Global Research, the nation is reaping substantial benefits from the AI surge, with chip exports increasing by over 50% compared to the previous year. In the long term, analysts believe South Korea’s robust investment in AI research and a rising number of AI-related patents will solidify its position in AI development.
Despite these positive indicators, analysts caution that geopolitical issues may threaten the semiconductor supply chain. The ongoing friction between the U.S. and China presents a particular challenge to South Korea’s AI advancement. Although South Korea has begun diversifying its chip exports away from China, the report notes that China and Hong Kong collectively accounted for over 30% of South Korea’s chip exports in 2023, with similar figures for exports to the U.S.
Should geopolitical tensions worsen, and if the U.S. implements additional trade restrictions on exports of advanced chips or AI-related technology to China, it could severely impact South Korea’s memory chip exports, according to Bank of America analysts.
Furthermore, South Korean semiconductor manufacturers rely on China for various chip production components and equipment. Disruption of this supply chain due to geopolitical tensions would complicate the ability of South Korean companies to obtain essential tools for chip manufacturing.
The U.S. has reportedly asked South Korea to limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request, taking into account the potential impact on major domestic companies like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
Additionally, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule. This regulation would restrict the sale of any goods manufactured with a specified percentage of U.S. intellectual property components to any nation, targeting those allies that continue to supply chipmaking tools to China.