South Korea is currently one of the few economies witnessing a productivity increase driven by artificial intelligence, although tensions between the U.S. and China regarding semiconductors may pose challenges to its growth, according to analysts at Bank of America.
The semiconductor sector is vital for South Korea, making up 17% of the country’s exports. The Bank of America Global Research report indicates that South Korea has been the primary beneficiary of the AI boom, experiencing over a 50% year-over-year increase in exports. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rise in AI-related patents, will strengthen its position in AI implementation over the long term.
However, potential geopolitical issues may disrupt the semiconductor supply chain, particularly due to escalating tensions between the U.S. and China. Although South Korea has shifted its chip exports from China to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being at a similar level.
Bank of America analysts warn that if U.S.-China tensions escalate further and the U.S. imposes more trade restrictions on advanced and AI-related chip exports to China, it could severely impact memory semiconductor exports from Korea.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Any disruptions in the supply chain caused by geopolitical tensions could hinder South Korean companies’ ability to acquire the tools needed for chip manufacturing.
The U.S. has reportedly urged South Korea to limit exports of equipment and technology to China pertinent to the production of memory chips and advanced logic chips, specifying chips more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean authorities are reportedly contemplating the U.S. request due to potential consequences for major South Korean corporations, including Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
Additionally, the Biden administration is considering implementing an export control measure known as the foreign direct product rule against allies that continue to provide chipmaking tools and equipment to China. This rule would restrict the export of any goods to a country if they have been manufactured using a specified percentage of U.S. intellectual property components.