South Korea is experiencing one of the few boosts in productivity attributed to artificial intelligence globally, according to Bank of America analysts. However, escalating U.S.-China tensions regarding semiconductor chips may threaten this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has become a significant beneficiary of the AI boom, with exports surging more than 50% compared to the previous year, as reported by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will strengthen its position in AI adoption.
On the flip side, the analysts cautioned that rising geopolitical tensions could impact the semiconductor supply chain. Specifically, the ongoing rivalry between the U.S. and China poses a challenge to South Korea’s AI growth. Although South Korea has diversified its chip exports away from China, in 2023, China and Hong Kong still accounted for over 30% of its chip exports, with similar figures for exports to the U.S.
If geopolitical tensions intensify and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could have serious repercussions on South Korea’s memory semiconductor exports, analysts warned.
Furthermore, South Korean chip manufacturers rely on China for some essential components and equipment for chip production. Any disruptions in this supply chain due to tensions could complicate the ability of South Korean companies to obtain 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 essential for producing memory chips and advanced logic chips, particularly those that exceed 14-nanometer technology for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are reportedly considering this request due to potential impacts on significant companies such as Samsung and SK Hynix, which operate within China, its largest trading partner.
In parallel, the Biden administration is reportedly contemplating the implementation of an export control mechanism known as the foreign direct product rule concerning 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 incorporates a specific percentage of U.S. intellectual property components.