Bank of America analysts report that South Korea is experiencing a productivity surge from artificial intelligence, making it one of the few economies benefiting in this way. However, ongoing tensions between the U.S. and China regarding semiconductor chips could hinder its growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has seen a substantial advantage from the AI boom, with exports increasing over 50% year-on-year as noted in a recent Bank of America Global Research report. Analysts project that South Korea’s significant investments in AI research and development, alongside a rising number of AI-related patents, will enhance its role in AI adoption moving forward.
Despite these optimistic forecasts, the report highlights that “potential geopolitical tensions could weigh on the semis supply chain,” particularly in light of the increasing conflict between the U.S. and China which could pose risks to South Korea’s AI growth. Although the country has shifted its chip exports beyond China to various regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar amount going to the U.S.
Bank of America analysts caution that if geopolitical tensions escalate and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory chip exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in this supply chain due to rising tensions would complicate the ability of South Korean firms to obtain essential tools for chip manufacturing.
Furthermore, reports indicate that the U.S. has urged South Korea to limit exports to China of the equipment and technology required for producing advanced memory chips and logic chips more sophisticated than 14 nanometers, as well as DRAM memory chips exceeding 18 nanometers. South Korean officials are weighing these requests from the U.S., considering the potential impact on major firms like Samsung and SK Hynix that operate in China, its top trading partner.
In a parallel development, the Biden administration is reportedly contemplating using an export control mechanism known as the foreign direct product rule, aimed at allies that continue providing chipmaking tools and equipment to China. This regulation would prohibit the export of any goods manufactured with a certain percentage of U.S. intellectual property to any nation.