South Korea is among the few economies globally experiencing a productivity surge due to artificial intelligence (AI), though escalating U.S.-China tensions regarding semiconductor technology may pose challenges to its growth, according to Bank of America analysts.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI industry, with exports increasing by over 50% year-over-year, as highlighted in a Bank of America Global Research report. Analysts believe that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will help solidify its position in AI advancements in the future.
However, potential geopolitical issues, particularly the ongoing tensions between the U.S. and China, could impact the semiconductor supply chain and hinder AI growth in South Korea. Despite efforts to diversify chip exports beyond China, the report notes that China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. being comparable.
Bank of America analysts warned that if geopolitical tensions escalate and the U.S. enforces additional trade restrictions on advanced chips destined for China, it could severely disrupt South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for various chipmaking components and equipment. Consequently, if geopolitical tensions lead to supply chain disruptions, it would become increasingly challenging for South Korean firms to obtain the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology crucial for manufacturing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, mindful of the potential repercussions on major companies like Samsung and SK Hynix, which have operations in China, its largest trading partner.
Meanwhile, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule on allies that continue to sell chipmaking tools to China. This regulation would prohibit the export of any goods to any country if they are manufactured with a specific percentage of U.S. intellectual property components.