Bank of America analysts have noted that South Korea is among the few economies benefiting from a productivity increase driven by artificial intelligence. However, tensions between the U.S. and China regarding semiconductor technologies could pose challenges to this growth.
The semiconductor sector is crucial for South Korea, contributing to 17% of its exports, and the nation has reportedly been the biggest beneficiary of the AI surge, with a growth of over 50% in exports year-on-year, as indicated in a recent Global Research report from Bank of America. Analysts believe that South Korea’s significant investments in AI research and development and its rising number of AI-related patents will further enhance its AI adoption trajectory in the long run.
Nevertheless, analysts caution that geopolitical tensions, particularly the escalating U.S.-China conflict, may impact the semiconductor supply chain, thereby affecting AI growth in South Korea. Although the country has shifted its chip export strategies away from China toward other regions, more than 30% of its semiconductor exports were directed to China and Hong Kong in 2023, reflecting a significant reliance on those markets. Exports to the U.S. were similarly substantial.
Bank of America analysts warned that if geopolitical tensions worsen and the U.S. imposes stricter trade restrictions on advanced or AI-related semiconductor exports to China, this could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for essential chipmaking components and machinery. Any disruption in the supply chain due to rising tensions could hinder South Korean companies’ ability to acquire the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of machinery and technology used in the production of memory chips and advanced logic chips, specifically those with a process node finer than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly weighing this request, considering the potential impact on major domestic firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In a related effort, the Biden administration is contemplating the application of an export control measure known as the foreign direct product rule against countries that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any goods to any country if they incorporate a particular percentage of U.S. intellectual property.