South Korea stands out as one of the few economies benefiting from increased productivity through artificial intelligence (AI), according to analysts from Bank of America. However, tensions between the U.S. and China concerning semiconductor chips may pose significant challenges to the nation’s growth.
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The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a key beneficiary of the AI surge, with exports rising over 50% year-over-year, as highlighted in a Bank of America Global Research report. Analysts project that South Korea’s substantial investments in AI research and development and its increasing number of AI-related patents will further bolster its position in AI adoption in the long run.
Nonetheless, the report warns that potential geopolitical tensions could affect the semiconductor supply chain, particularly due to escalating friction between the U.S. and China, which could hinder AI growth in South Korea. Although South Korea has broadened its chip export markets beyond China, over 30% of its chip exports still went to China and Hong Kong in 2023, with a similar portion directed to the U.S.
Bank of America analysts noted that if U.S.-China tensions worsen and the U.S. imposes more trade restrictions on advanced or AI-related chip exports to China, it could significantly impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to geopolitical tensions could complicate the ability of South Korean companies to procure essential manufacturing tools.
The U.S. is reportedly urging South Korea to limit exports of equipment and technology for memory chips and advanced logic chips to China, specifically targeting logic chips more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are considering the U.S. request, mindful of potential repercussions for major South Korean companies like Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
In addition, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule on allied nations that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any country if they are produced using a specific percentage of U.S. intellectual property components.