South Korea is uniquely positioned as the only major global economy experiencing a productivity surge thanks to artificial intelligence. However, analysts from Bank of America warn that rising tensions between the U.S. and China over semiconductor technology could pose a significant threat to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as the largest beneficiary of the AI wave, with exports rising by over 50% compared to the previous year, as noted in a Bank of America Global Research report. Analysts project that South Korea’s substantial investment in AI research and development, alongside an increasing number of AI-related patents, will enhance its standing in AI adoption in the long run.
Nevertheless, concerns about geopolitical tensions could impact the semiconductor supply chain, particularly given the ongoing friction between the U.S. and China. Even as South Korea diversifies its chip exports beyond China, over 30% of its semiconductor exports in 2023 were directed to China and Hong Kong, with a similar proportion allocated to the United States.
Bank of America analysts cautioned that if geopolitical disputes intensify and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, this could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for specific components and equipment essential for chip production. Any disruption in the supply chain caused by escalating tensions could hinder South Korean companies from acquiring the necessary tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used in memory chip production and advanced logic chips, particularly those exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request, aware of the potential implications for key domestic firms like Samsung and SK Hynix, which heavily depend on operations in China, its largest trading partner.
Additionally, the Biden administration is contemplating implementing an export control known as the foreign direct product rule, aimed at allies that continue to provide chipmaking tools and equipment to China. This rule would prohibit the export of goods to any country if they are produced using a specified percentage of U.S. intellectual property.