South Korea is one of the few economies globally experiencing a productivity increase attributed to artificial intelligence, although U.S.-China tensions regarding semiconductor supplies could pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s total exports, and the nation has emerged as a significant beneficiary of the AI boom, with exports rising over 50% year-over-year, as noted in a report from Bank of America Global Research. Analysts are optimistic about South Korea’s future, citing its substantial investments in AI research and development and an increasing number of AI-related patents, which are expected to enhance its capabilities in AI adoption.
However, analysts warn that geopolitical tensions could impact the semiconductor supply chain, particularly the escalating conflicts between the U.S. and China, which could hinder AI growth in South Korea. Despite the country’s efforts to diversify its chip exports away from China, it’s reported that over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being approximately equal.
Bank of America analysts stated that if geopolitical tensions intensify and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could have a detrimental effect on South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. A disruption in the supply chain due to heightened tensions could hinder the ability of South Korean companies to acquire the essential tools for manufacturing chips.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology used in the production of advanced memory chips and logic chips, specifically those that exceed 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are considering this request, mindful of potential impacts on major local companies like Samsung and SK Hynix that operate in China, South Korea’s largest trading partner.
Furthermore, the Biden administration is said to be contemplating the implementation of an export control measure known as the foreign direct product rule against allies who continue to supply chipmaking tools and technology to China. This rule would prohibit the export of any goods manufactured with a certain percentage of U.S. intellectual property components to any country.