Bank of America analysts have highlighted South Korea as one of the few countries experiencing productivity gains from artificial intelligence, although rising tensions between the U.S. and China regarding the semiconductor industry could pose challenges to its growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and it has significantly benefited from the AI revolution, with exports rising over 50% year-on-year, according to a report from Bank of America’s Global Research team. Analysts believe that South Korea’s substantial investment in AI research and development, coupled with an increasing number of AI-related patents, will further enhance its position in AI adoption in the long run.
However, the report cautioned that potential geopolitical conflicts might impact the semiconductor supply chain, especially the ongoing discord between the U.S. and China, which could hinder AI growth in South Korea. Despite diversifying its chip exports to other regions, over 30% of South Korea’s chip exports were to China and Hong Kong in 2023, with exports to the U.S. being approximately equal.
The analysts warned that if geopolitical tensions escalate and the U.S. imposes stricter trade limitations on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports. Additionally, South Korean semiconductor manufacturers rely on China for certain components and manufacturing equipment, and any disruption in the supply chain could complicate their ability to produce chips.
Reports indicate that the U.S. has urged South Korea to limit exports to China of equipment and technology necessary for creating memory and advanced logic chips, particularly those chips surpassing the 14-nanometer and 18-nanometer processes, respectively. South Korean officials are reportedly considering the U.S. request, mindful of the potential consequences for major companies like Samsung and SK Hynix, which operate within China, South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule forbids the export of any product manufactured with a certain percentage of U.S. intellectual property to any foreign nation.