South Korea stands out as one of the few economies worldwide experiencing a productivity increase thanks to artificial intelligence (AI), although analysts from Bank of America note that rising tensions between the U.S. and China regarding semiconductor technology pose potential risks to its growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant player in the AI market, with exports soaring over 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a growing portfolio of AI-related patents, will bolster its adoption of AI in the future.
However, the report underscores that geopolitical tensions could create challenges for the semiconductor supply chain, particularly amid escalating U.S.-China relations. Although South Korea has made efforts to diversify its chip exports beyond China, over 30% of its semiconductor exports in 2023 were still directed to China and Hong Kong, with similar figures for the U.S.
Bank of America analysts warned that if U.S.-China tensions escalate further, particularly through the imposition of additional trade restrictions on advanced or AI-related semiconductor exports to China, South Korea’s memory chip exports could suffer significantly.
Moreover, South Korean semiconductor manufacturers rely on China for certain chip components and manufacturing equipment. Consequently, any disruption in these supply chains due to geopolitical tensions could hinder their ability to produce chips effectively.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, specifically targeting logic chips exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering the U.S. request, mindful of the potential impact on significant domestic firms like Samsung and SK Hynix, which have operations in China — their largest trading partner.
Additionally, the Biden administration is reportedly contemplating implementing an export control known as the foreign direct product rule, aimed at allies that continue to sell chipmaking tools to China. This regulation would prohibit the export of goods made with a specific percentage of U.S. intellectual property to any country.