South Korea stands out as one of the few economies globally experiencing a productivity increase attributed to artificial intelligence (AI). However, analysts from Bank of America warn that rising U.S.-China tensions over semiconductor technology could pose significant risks to this growth trajectory.
According to a report by Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, with the country being a primary beneficiary of the AI surge, as evidenced by a more than 50% year-on-year increase in exports. Analysts project that South Korea’s substantial investment in AI research and development, alongside a growing portfolio of AI-related patents, will bolster its position in AI implementation in the future.
Nonetheless, the analysts caution that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly in light of escalating conflicts between the U.S. and China. While South Korea has successfully diversified its chip exports beyond China, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with exports to the U.S. at a similar rate.
The report emphasizes that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on exports of advanced or AI-related semiconductor technology to China, it could severely impact South Korea’s memory chip exports. Furthermore, South Korean chip manufacturers rely on China for various components and equipment essential for chip production. Disruptions in this supply chain would complicate efforts for South Korean firms to obtain the necessary tools for manufacturing semiconductors.
Additionally, it has been reported that the U.S. has requested South Korea to limit exports to China of equipment and technologies used to produce memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean authorities are reportedly considering this request, mindful of its potential impact on major firms like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
In another development, the Biden administration is purportedly contemplating the implementation of an export control mechanism known as the foreign direct product rule, which would target allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any product to any country if it is produced using a certain percentage of U.S. intellectual property components.