South Korea stands out as one of the few economies worldwide experiencing a productivity increase due to artificial intelligence, but escalating U.S.-China tensions concerning semiconductor technology could hinder its growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a major beneficiary of the AI surge, witnessing exports rise by over 50% year-over-year, as highlighted in a Bank of America Global Research report. Analysts believe that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will enhance its position in AI adoption in the long run.
However, the report notes that geopolitical tensions could impact the semiconductor supply chain, particularly the deteriorating relationship between the U.S. and China. Despite efforts to diversify its chip exports beyond China, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with similar figures for exports to the U.S.
Bank of America analysts warned that if geopolitical conflicts escalate and the U.S. enforces further trade restrictions on advanced or AI-relevant chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for essential components and equipment in chip production. Disruptions in the supply chain due to heightened tensions would make it increasingly challenging for South Korean companies to procure the necessary tools for chip fabrication.
Reportedly, the U.S. has urged South Korea to limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, particularly those exceeding the 14-nanometer and 18-nanometer thresholds. South Korean officials are contemplating this request due to potential impacts on major companies like Samsung and SK Hynix, which operate in China, its largest trading partner.
Simultaneously, the Biden administration is said to be exploring the implementation of an export control termed the foreign direct product rule on allies that continue supplying chipmaking tools and equipment to China. This rule prohibits exporting any goods produced with a certain percentage of U.S. intellectual property components to any country.