South Korea is among the few economies globally experiencing a productivity increase from artificial intelligence, but analysts from Bank of America warn that escalating U.S.-China tensions over semiconductor technology may pose challenges to its growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and it has been described as the primary beneficiary of the AI boom, with exports rising over 50% year-over-year, according to a report from Bank of America Global Research. Analysts express optimism for South Korea’s long-term prospects in AI, highlighting its significant investment in research and development as well as a growing number of AI-related patents, which they believe will enhance the country’s AI adoption.
Nonetheless, analysts caution that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly in light of the rising tensions between the U.S. and China. Despite South Korea’s efforts to diversify its chip exports beyond China, the report indicates that over 30% of its chip exports in 2023 were directed to China and Hong Kong, with similar volumes sent to the U.S.
The analysts assert that if geopolitical tensions escalate and the U.S. were to impose further trade restrictions on the export of advanced or AI-related chips to China, it could seriously jeopardize South Korea’s memory chip exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Any disruptions in the supply chain caused by geopolitical tensions could complicate access to these essential tools.
Reportedly, the U.S. has requested South Korea to limit exports to China of equipment and technology needed to produce memory chips and advanced logic chips, particularly those employing technology more sophisticated than 14 nanometers, and DRAM memory chips exceeding 18 nanometers. South Korean officials are reportedly considering the U.S. request due to potential implications for major companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Meanwhile, the Biden administration is contemplating implementing an export control known as the foreign direct product rule, targeting allies that continue supplying chipmaking tools to China. This rule would prevent the export of any goods to any nation if they are manufactured using a certain proportion of U.S. intellectual property components.