South Korea stands out as one of the few economies experiencing a productivity boost from artificial intelligence, but potential challenges arise from U.S.-China tensions in the semiconductor sector, according to analysts from Bank of America.
The semiconductor industry, which constitutes 17% of South Korea’s exports, has benefited significantly from the AI boom, with exports reportedly increasing by over 50% year-on-year. The Bank of America Global Research report highlights South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, which are expected to enhance the country’s position in AI adoption over time.
Nevertheless, analysts caution that geopolitical tensions could negatively impact the semiconductor supply chain, particularly due to escalating conflicts between the U.S. and China. Although South Korea has diversified its chip exports beyond China, more than 30% of its chip exports in 2023 were still directed to China and Hong Kong, which is comparable to the volume exported to the United States.
Bank of America analysts noted that if geopolitical tensions worsen and the U.S. were to impose new trade restrictions on advanced or AI-related chip exports to China, it could considerably disrupt memory semiconductor exports from Korea.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruption to this supply chain could hinder South Korean firms’ ability to obtain necessary production tools.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips—specifically those chips more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are reportedly considering this request, mindful of potential repercussions for major domestic firms like Samsung and SK Hynix, which maintain operations in China, its primary trading partner.
In parallel, the Biden administration is contemplating the application of the foreign direct product rule to allies that continue to supply chipmaking tools and equipment to China. This regulation would prevent the export of any goods to any country if they are produced using a certain percentage of U.S. intellectual property components.