South Korea stands out as one of the few economies experiencing a productivity increase from artificial intelligence, yet escalating tensions between the U.S. and China over semiconductor technology pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a primary beneficiary of the AI surge, with exports climbing over 50% year-on-year, as highlighted in a Bank of America Global Research report. The analysts project that South Korea’s significant investment in AI research and development, along with a rising number of AI-related patents, will enhance its standing in AI adoption moving forward.
However, the analysts caution that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly due to increasing friction between the U.S. and China, which could challenge South Korea’s AI advancements. Despite diversifying its chip exports away from China to other regions, China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. being approximately equal.
If geopolitical tensions worsen and the U.S. enforces further trade restrictions on the export of advanced or AI-related chips to China, it could severely impact South Korean memory semiconductor exports, the analysts warned.
Additionally, South Korean chip manufacturers rely on China for essential components and equipment in chip production. Disruptions in the supply chain due to rising tensions could complicate access to the necessary tools for South Korean firms to manufacture chips.
Reports indicate that the U.S. has urged South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, particularly those that surpass 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request due to potential repercussions for major firms, such as Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
Furthermore, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule on allies that persist in supplying chipmaking tools and equipment to China. This regulation would prevent the export of any goods to any country if they are made with a specific percentage of U.S. intellectual property.