Analysts at Bank of America have indicated that South Korea is one of the few economies experiencing a productivity increase due to artificial intelligence. However, escalating tensions between the U.S. and China regarding semiconductor technology could hinder South Korea’s growth, they warn.
The semiconductor sector is crucial for South Korea, representing 17% of its total exports. According to a report by Bank of America Global Research, the country has greatly benefitted from the AI surge, with semiconductor exports soaring by over 50% year-over-year. Analysts predict that South Korea’s substantial investment in AI research and development, coupled with an increasing number of AI-related patents, will enhance its position in AI adoption further.
Nevertheless, they caution that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly the ongoing strain between the U.S. and China, which could pose risks to AI expansion in South Korea. Although the country has worked to shift its chip exports from China to other regions, reports indicate that over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar amount directed to the U.S.
Bank of America analysts warn that if U.S.-China tensions escalate and the United States enacts further trade restrictions on the export of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could complicate access to these essential tools.
The United States has reportedly urged South Korea to limit exports to China of specific equipment and technology related to memory chips and advanced logic chips, particularly those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are contemplating this request, considering the potential impact on major companies like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Meanwhile, the Biden administration is reportedly contemplating utilizing an export control measure known as the foreign direct product rule for allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any product to any nation if it is manufactured with a specified percentage of U.S. intellectual property components.