Bank of America analysts have highlighted that South Korea is among the few economies benefiting from increased productivity due to artificial intelligence. However, ongoing tensions between the U.S. and China regarding semiconductor technology could pose risks to its growth potential.
The semiconductor sector plays a crucial role in South Korea’s economy, contributing to 17% of the nation’s exports. The Bank of America Global Research report noted that South Korea has emerged as a significant beneficiary of the AI surge, with semiconductor exports experiencing more than a 50% increase year-over-year. Analysts project that the country’s substantial investment in AI research and development, alongside a rising number of AI-related patents, will solidify its leadership in AI adoption in the long run.
Despite these positive trends, the report indicates that “potential geopolitical tensions could weigh on the semis supply chain,” particularly due to escalating conflicts between the U.S. and China, which may hinder AI growth in South Korea. Although South Korea has been diversifying its chip exports beyond China, over 30% of its semiconductor exports in 2023 were directed towards China and Hong Kong, a percentage comparable to exports destined for the U.S.
The analysts cautioned that if U.S.-China tensions heighten and Washington imposes additional trade restrictions on AI-related or advanced semiconductor exports to China, it could substantially impact South Korea’s memory chip exports.
Furthermore, South Korean chip manufacturers rely on China for certain critical components and equipment necessary for chip production. Consequently, any disruption in the geopolitical landscape could complicate access to essential manufacturing tools for these firms.
Reports suggest that the U.S. has urged South Korea to limit exports to China of equipment and technology crucial for producing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer specifications. South Korean officials are reportedly deliberating this request, considering the potential repercussions for major companies like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule, targeting allies that continue supplying chipmaking technologies and equipment to China. This rule restricts the export of goods manufactured with a certain threshold of U.S. intellectual property content to any country.