South Korea is experiencing a productivity increase driven by artificial intelligence, distinguishing it from many other global economies. However, analysts from Bank of America caution that the ongoing tensions between the U.S. and China regarding semiconductors may pose challenges to this growth.
According to a report by Bank of America Global Research, the semiconductor sector is critical to South Korea’s economy, comprising 17% of its exports. The report highlights that South Korea has emerged as the primary beneficiary of the AI surge, with its exports increasing by over 50% year-on-year. Analysts believe the nation’s significant investment in AI research and development, alongside a rising number of AI-related patents, will bolster its standing in AI adoption over time.
Conversely, the report warns that geopolitical issues, particularly the escalating U.S.-China tensions, could impact the semiconductor supply chain and hinder AI development in South Korea. Despite diversifying chip exports beyond China, the nation still exported over 30% of its chips to China and Hong Kong in 2023, with exports to the U.S. being approximately equal.
Analysts state that further escalation of geopolitical tensions, especially if the U.S. implements additional trade restrictions on advanced or AI-related chip exports to China, could severely affect South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for various components and equipment essential for chip production. Disruptions in this supply chain could lead to challenges for these companies in obtaining necessary manufacturing tools.
Reports indicate that the U.S. has requested South Korea to limit its exports of equipment and technology used in the production of memory chips and advanced logic chips, notably those surpassing the 14-nanometer and 18-nanometer thresholds. South Korean officials are reportedly considering this request, taking into account the potential impact on major firms such as Samsung and SK Hynix that have operations in China, which is South Korea’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating applying an export control known as the foreign direct product rule to allies that continue supplying chipmaking tools and equipment to China. This rule prohibits the export of any goods manufactured with a specified percentage of U.S. intellectual property components to any country.