South Korea stands out as one of the few economies globally experiencing a productivity surge thanks to artificial intelligence, though analysts from Bank of America caution that escalating U.S.-China tensions over semiconductors could pose challenges to its economic growth.
According to a report from Bank of America Global Research, the semiconductor sector is a significant pillar of South Korea’s economy, comprising 17% of its exports. The country has benefited immensely from the AI revolution, with exports soaring over 50% year-on-year. The report suggests that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will bolster its standing in AI adoption in the long run.
Nonetheless, analysts express concern that geopolitical tensions, particularly surrounding the U.S. and China, could impact the semiconductor supply chain, thereby hindering South Korea’s AI growth. Although South Korea has been taking steps to diversify its chip exports to countries outside of China, over 30% of its chip exports in 2023 were still sent to China and Hong Kong, with similar figures for exports to the U.S.
Bank of America analysts warned that if U.S.-China tensions escalate and the U.S. enacts further trade restrictions on advanced semiconductor exports to China, it could considerably harm South Korea’s memory semiconductor exports.
Moreover, South Korean chipmakers rely on China for various chipmaking components and equipment. Any disruption in this supply chain could complicate the ability of South Korean companies to acquire the necessary tools for chip production.
Reportedly, the U.S. has requested that South Korea limit exports of certain semiconductor manufacturing technologies and equipment to China, particularly for advanced chips, such as those more advanced than 14-nanometer logic chips and DRAM memory chips exceeding 18-nanometer specifications. South Korean officials are contemplating this request, considering the potential impact on major corporations like Samsung and SK Hynix, which have significant operations in China.
In the meantime, the Biden administration is reportedly evaluating the use of the foreign direct product rule, which could restrict exports to China by allies that continue to supply semiconductor manufacturing tools and equipment. This rule prohibits the export of any product if it incorporates a certain percentage of U.S. intellectual property in its manufacturing.