South Korea is one of the few economies experiencing a productivity boost from artificial intelligence, but tensions between the U.S. and China over semiconductor chips could challenge this growth, according to Bank of America analysts.
The semiconductor industry constitutes 17% of South Korea’s exports, and the country has significantly benefited from the AI boom, with exports increasing by over 50% year-over-year, according to a Bank of America Global Research report. In the long-term, analysts believe South Korea’s substantial investment in AI research and development, alongside the rising number of AI-related patents, will strengthen its position in AI adoption.
However, analysts warn that geopolitical tensions, particularly between the U.S. and China, might impact the semiconductor supply chain and present a challenge to AI growth in South Korea. Despite diversifying its chip exports away from China, China and Hong Kong still accounted for over 30% of South Korea’s chip exports in 2023. Exports to the U.S. were similarly significant.
Bank of America analysts noted that if geopolitical tensions escalate and the U.S. imposes additional trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports. South Korean chip manufacturers also rely on China for certain chipmaking components and equipment, so any supply chain disruption would complicate the production process.
The U.S. has reportedly asked South Korea to limit exports to China of equipment and technology used to produce memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request due to potential impacts on key firms like Samsung and SK Hynix, which operate extensively in China.
Meanwhile, the Biden administration is reportedly contemplating applying an export control known as the foreign direct product rule on allies continuing to sell chipmaking tools and equipment to China. This rule would prohibit the export of goods made with a certain percentage of U.S. intellectual property to any country, including China.