South Korea is one of the few economies witnessing a rise in productivity attributed to advancements in artificial intelligence. However, according to analysts from Bank of America, tensions between the United States and China regarding semiconductor technology may pose risks to this growth.
The semiconductor sector represents 17% of South Korea’s total exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports increasing by over 50% year-on-year, as noted in a Bank of America Global Research report. Analysts predict that South Korea’s substantial investment in AI research and development, alongside a rising number of AI-related patents, will bolster its leadership in AI adoption over the long run.
Despite this positive outlook, analysts caution that escalating geopolitical tensions could impact the semiconductor supply chain, particularly in light of the ongoing strain between the U.S. and China. While South Korea has begun to redirect its chip exports away from China to various other markets, the report highlights that over 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being comparable.
Should tensions between the two superpowers increase and the U.S. implement further trade restrictions on the export of advanced or AI-related chips to China, it could severely affect South Korea’s memory chip exports, according to Bank of America analysts.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruption in the supply chain due to geopolitical strains could hinder South Korean companies’ access to the necessary tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are considering the U.S. request due to potential consequences for major domestic companies, such as Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In response, the Biden administration is contemplating implementing an export control known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods manufactured with a specific percentage of U.S. intellectual property components to any country.