South Korea is one of the few economies worldwide experiencing a productivity boost from artificial intelligence (AI), but rising tensions between the U.S. and China regarding semiconductor chips could pose significant challenges to its growth, according to analysts from Bank of America.
The semiconductor sector is vital for South Korea, accounting for 17% of its exports, and has reportedly benefited the most from the AI surge, with exports increasing by over 50% year-over-year, as detailed in a report by Bank of America Global Research. Analysts predict that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption over the long term.
However, potential geopolitical conflicts could impact the semiconductor supply chain. Analysts point specifically to the escalating tensions between the U.S. and China as a threat to AI growth in South Korea. Although South Korea has begun diversifying its chip exports away from China to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with U.S. exports accounting for a similar percentage.
Bank of America analysts cautioned that if geopolitical tensions escalate and the U.S. implements stricter trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
In addition, South Korean chip manufacturers rely on China for various chipmaking components and equipment. If tensions disrupt the supply chain, it will become increasingly challenging for these companies to access the necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit its exports of technology and equipment used for manufacturing memory chips and advanced logic chips to China, particularly those more advanced than 14-nanometer for logic chips and beyond 18-nanometer for DRAM memory chips. South Korean officials are contemplating this request due to the potential impact on major firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Additionally, the Biden administration is said to be considering implementing an export control framework known as the foreign direct product rule on allies that continue to provide chipmaking tools and equipment to China. This rule would prevent the export of any item to any country if it is manufactured with a specific percentage of U.S. intellectual property.