Bank of America analysts have reported that South Korea is among the few global economies experiencing a productivity increase driven by artificial intelligence. However, they warn that escalating U.S.-China tensions over semiconductor supplies could pose a threat to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a major beneficiary of the AI surge, with exports rising by more than 50% year-over-year, as noted in a Bank of America Global Research report. Analysts believe that significant investments in AI research and development and a growing number of AI-related patents will enhance South Korea’s AI adoption in the longer term.
Nevertheless, the analysts caution that geopolitical tensions may disrupt the semiconductor supply chain, particularly those stemming from U.S.-China relations, which could challenge AI development in South Korea. Even though South Korea has been diversifying its chip exports beyond China, the report indicates that China and Hong Kong accounted for over 30% of its chip exports in 2023, matching the volume exported to the U.S.
They point out that if geopolitical tensions worsen and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, this could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean semiconductor manufacturers rely on China for certain chipmaking components and equipment. Any disruptions in these supply chains due to rising tensions could hinder Korean firms’ ability to obtain essential production tools.
The U.S. has reportedly asked South Korea to limit exports of equipment and technology necessary for manufacturing memory and advanced logic chips to China, particularly concerning logic chips exceeding 14-nanometers and DRAM chips beyond 18-nanometers. South Korean officials are considering this request, aware of potential fallout for major firms like Samsung and SK Hynix, which operate in China, the country’s largest trading partner.
In parallel, the Biden administration is contemplating implementing an export control known as the foreign direct product rule aimed at allies who continue supplying chipmaking equipment to China. This regulation would prevent exporting any products to any country if they utilize a specified percentage of U.S. intellectual property components in their manufacturing.