Analysts from Bank of America have indicated that South Korea is among the few economies worldwide experiencing productivity gains from artificial intelligence. However, U.S.-China tensions surrounding semiconductor chips could pose a significant challenge to the country’s growth.
The semiconductor sector constitutes 17% of South Korea’s total exports, and the country has emerged as the primary beneficiary of the AI surge, with a year-over-year export increase exceeding 50%, as highlighted in a Bank of America Global Research report. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will further enhance its standing in AI utilization over the long term.
Nevertheless, analysts caution that geopolitical tensions may impact the semiconductor supply chain, particularly in light of escalating conflicts between the U.S. and China. Although South Korea has diversified its chip exports beyond China to other regions, over 30% of its chip exports still comprised sales to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar percentage.
According to Bank of America analysts, should geopolitical strife worsen and the U.S. impose 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 companies rely on China for various chipmaking components and equipment. Consequently, any disruptions in the supply chain due to tensions could make it increasingly challenging for South Korean manufacturers to obtain the necessary tools for chip production.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the manufacturing of memory chips and advanced logic chips, specifically those chips that are more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, given the potential consequences for major South Korean corporations like Samsung and SK Hynix, both of which have operations in China, South Korea’s largest trade partner.
In parallel, the Biden administration is exploring the possibility of enforcing an export control measure known as the foreign direct product rule on allies that supply chipmaking tools and equipment to China. This regulation would restrict the export of any goods to any nation if they contain a certain percentage of U.S. intellectual property components.