Analysts from Bank of America report that South Korea is one of the few economies globally experiencing productivity gains from artificial intelligence (AI), although escalating U.S.-China tensions over semiconductors could pose a threat to its growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI surge, with exports rising over 50% year-on-year. Bank of America’s Global Research report highlights that South Korea’s substantial investments in AI research and development, along with a growing number of AI-related patents, will likely enhance its position in AI adoption in the long run.
However, analysts warn that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly due to rising conflicts between the U.S. and China, which could challenge South Korea’s AI expansion. While South Korea has diversified its chip exports from China to other regions, an estimated 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar proportion headed to the U.S.
Bank of America analysts caution that if geopolitical tensions escalate and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for some components and equipment necessary for chip production. Any disruptions in the supply chain due to heightened tensions would make it more challenging for these companies to acquire the tools needed for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology for producing memory and advanced logic chips to China, specifically targeting logic chips more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly considering this request, mindful of the potential impact on major firms like Samsung and SK Hynix, which have operations in China—their largest trading partner.
In a related development, the Biden administration is reportedly contemplating the implementation of an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of goods to any nation if they contain a certain percentage of U.S. intellectual property.