South Korea stands out as one of the few economies globally experiencing a productivity boost from artificial intelligence, though analysts from Bank of America caution that rising tensions between the U.S. and China over semiconductor chips could pose challenges to this growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s total exports, and the country has been the top beneficiary of the AI surge, with a year-on-year export increase of over 50%. The analysts foresee that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will continue to enhance its position in the adoption of AI technologies.
However, the report highlights that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly due to escalating U.S.-China relations, which may hinder AI growth in South Korea. Despite the country’s efforts to diversify its chip exports to other regions, over 30% of its semiconductor exports in 2023 were directed to China and Hong Kong, with similar figures for exports to the U.S.
Bank of America analysts warned that if geopolitical conflicts deepen and the U.S. enacts further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact Korea’s memory semiconductor exports.
Additionally, South Korean chipmakers rely on China for specific chipmaking components and equipment. Disruption in the supply chain due to geopolitical tensions could complicate access to necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology related to memory chips and advanced logic chips, particularly those exceeding 14 nanometers for logic chips and 18 nanometers for DRAM memory chips. South Korean officials are reportedly deliberating the U.S. request, considering its potential impact on major domestic firms like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
Simultaneously, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule. This rule would prevent any goods from being exported to countries if they are produced using a certain percentage of U.S. intellectual property components, targeting allies that continue supplying chipmaking tools and equipment to China.