South Korea stands out as one of the few economies globally experiencing a productivity increase due to artificial intelligence, though U.S.-China tensions regarding semiconductors pose a potential threat to its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, making it a vital part of the country’s economy. A recent report from Bank of America Global Research indicates that South Korea has been the leading beneficiary of the AI surge, with exports rising over 50% year-over-year. Analysts believe that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will bolster its position in AI adoption moving forward.
However, the analysts caution that potential geopolitical tensions could negatively impact the semiconductor supply chain, particularly the escalating conflict between the U.S. and China, which could hinder AI growth in South Korea. Despite diversifying its chip exports away from China, Chinese and Hong Kong destinations accounted for over 30% of South Korea’s chip exports in 2023. Exports to the U.S. were similarly significant.
The report warns that if geopolitical tensions escalate and the U.S. enforces new trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports. South Korean chip manufacturers also rely on China for specific components and equipment essential for chip production. Disruptions in these supply channels could complicate operations for South Korean firms.
Additionally, the U.S. has reportedly asked South Korea to limit exports of equipment and technology used for manufacturing memory chips and advanced logic chips to China. This includes restrictions on logic chips more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean authorities are considering this request, taking into account potential fallout on major companies like Samsung and SK Hynix, which have a significant presence in China, South Korea’s largest trading partner.
In parallel, the Biden administration is said to be evaluating the implementation of an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of goods made with a certain percentage of U.S. intellectual property to any country.