South Korea stands out as one of the few nations experiencing a rise in productivity driven by artificial intelligence, although analysts from Bank of America caution that escalating U.S.-China tensions regarding semiconductors could pose risks to the country’s growth prospects.
The semiconductor sector plays a crucial role in South Korea’s economy, representing 17% of its exports. A recent report from Bank of America Global Research highlights that South Korea has become the largest beneficiary of the AI surge, with semiconductor exports increasing by over 50% year on year. Long-term projections suggest that South Korea’s substantial investments in AI research and development and an increasing number of AI-related patents will strengthen its position in AI adoption.
Nevertheless, the report warns that potential geopolitical tensions, particularly those between the U.S. and China, could adversely affect South Korea’s semiconductor supply chain and subsequently hinder its AI growth. Despite efforts to diversify chip exports beyond China, over 30% of South Korea’s semiconductor exports in 2023 were directed to China and Hong Kong, with roughly the same amount headed to the United States.
Bank of America analysts point out that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could significantly impact Korea’s memory semiconductor sector.
Furthermore, South Korean chip manufacturers rely on China for various components and equipment needed for chip production. Disruptions in the supply chain due to heightened tensions could complicate access to these essential tools.
Reports indicate that the U.S. has urged South Korea to impose restrictions on its exports to China concerning the technology and equipment used for manufacturing memory and advanced logic chips, particularly those exceeding 14-nanometer and 18-nanometer technologies, respectively. South Korean officials are reportedly deliberating on this request, mindful of the potential impact on major domestic firms like Samsung and SK Hynix, both of which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is considering the imposition of export controls based on the foreign direct product rule, aimed at allies who continue to supply chipmaking equipment to China. This regulation would prohibit the export of any goods produced with a significant percentage of U.S. intellectual property components to any country.