South Korea stands out as one of the few economies globally experiencing productivity gains driven by artificial intelligence, though tensions between the U.S. and China over semiconductor technology could pose challenges to its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a major beneficiary of the AI surge, with exports increasing by over 50% year-on-year, as highlighted in a report by Bank of America Global Research. Analysts predict that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will bolster its position in AI adoption moving forward.
Nonetheless, the report warns that potential geopolitical tensions may impact the semiconductor supply chain, particularly the escalating rivalry between the U.S. and China, which could hinder AI development in South Korea. Despite the country diversifying its chip exports beyond China to other regions, it was noted that China and Hong Kong comprised over 30% of South Korea’s chip exports in 2023, with a similar share directed toward the U.S.
Bank of America analysts remarked that if geopolitical tensions escalate and the U.S. introduces further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for several components and equipment essential for chip production. Any disruptions in the supply chain due to heightened tensions could complicate the ability of South Korean firms to acquire the necessary tools to manufacture chips.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are contemplating this request amid concerns over potential repercussions for major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Additionally, the Biden administration is reportedly considering implementing a foreign direct product rule, which would restrict exports to allies that continue to supply chipmaking tools and equipment to China. This regulation would prevent any goods from being exported if a certain percentage of their components are derived from U.S. intellectual property.