South Korea is among the few economies worldwide experiencing a rise in productivity attributed to artificial intelligence, but analysts from Bank of America warn that escalating U.S.-China tensions regarding semiconductor technology could hinder its growth.
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The semiconductor sector represents 17% of South Korea’s exports, and it has emerged as the primary beneficiary of the AI boom, boasting over a 50% increase in exports compared to the previous year, as detailed in a report from Bank of America Global Research. Analysts predict that South Korea’s substantial investments in AI research and development and a growing portfolio of AI-related patents will enhance its position in AI implementation over the long run.
Nevertheless, the report highlights that “potential geopolitical tensions could impact the semiconductor supply chain,” particularly amid heightened tensions between the U.S. and China, which may pose obstacles to AI expansion in South Korea. Despite diversifying its chip exports to other regions, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, a figure comparable to exports destined for the U.S.
According to Bank of America analysts, if geopolitical conflicts intensify and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could significantly weaken South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers are reliant on China for specific chipmaking components and equipment. Disruptions in the supply chain due to ongoing tensions could create challenges for South Korean companies in acquiring the necessary tools for chip production.
Reports indicate that the U.S. has requested that South Korea limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, with a focus on logic chips more advanced than 14 nanometers and DRAM memory chips exceeding 18 nanometers. South Korean officials are reportedly deliberating this request due to potential impacts on major domestic firms like Samsung and SK Hynix, which have substantial operations in China, South Korea’s largest trading partner.
In addition, the Biden administration is reportedly contemplating implementing an export control known as the foreign direct product rule on allies that persist in supplying chipmaking tools and equipment to China. This rule prohibits the export of any goods to any country if they are manufactured with a certain percentage of U.S. intellectual property components.