South Korea is among the few economies globally experiencing a productivity boost attributed to artificial intelligence (AI), although ongoing tensions between the U.S. and China regarding semiconductor technologies may pose a threat to its growth, analysts at Bank of America have indicated.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as the largest beneficiary of the AI surge, with exports soaring by over 50% year-over-year, per a report from Bank of America Global Research. Analysts predict that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will enhance its role in AI adoption moving forward.
Nevertheless, the report highlights that potential geopolitical tensions could impact the semiconductor supply chain. Specifically, the escalating friction between the U.S. and China could challenge South Korea’s AI growth. Though the nation has begun diversifying its chip exports away from China toward other regions, over 30% of its chip exports still went to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar proportion.
Bank of America analysts cautioned that should geopolitical tensions worsen and the U.S. impose further trade restrictions on advanced or AI-related chip exports to China, it would potentially jeopardize memory semiconductor exports from South Korea.
Additionally, South Korean semiconductor enterprises rely on China for certain components and equipment necessary for chip production. Any disruption in these supply chains due to heightened tensions could hinder South Korean companies’ abilities to procure essential manufacturing tools.
Reports suggest that the U.S. has requested South Korea to curb exports to China of equipment and technologies for producing advanced memory chips and logic chips, particularly those more advanced than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean officials are reportedly deliberating this request due to possible repercussions for major corporations, including Samsung and SK Hynix, which have operations in China, its largest trade partner.
Moreover, the Biden administration is said to be contemplating the application of an export control mechanism known as the foreign direct product rule that could affect allies continuing to supply chipmaking tools and equipment to China. This rule prohibits the export of goods manufactured using a specified percentage of U.S. intellectual property to any country.