South Korea is experiencing a notable productivity increase attributed to artificial intelligence, making it one of the few economies benefiting from this technology. However, analysts from Bank of America have indicated that escalating U.S.-China tensions surrounding semiconductors may pose challenges for South Korea’s growth.
The semiconductor industry represents 17% of South Korea’s exports. A report from Bank of America Global Research highlights that South Korea has reaped substantial rewards from the AI boom, with exports surging more than 50% year-over-year. Analysts project that the country’s significant investment in AI research and development, alongside a rising number of AI-related patents, will bolster its position in the AI landscape over time.
Nonetheless, the report cautions that geopolitical tensions could impact the semiconductor supply chain. In particular, the ongoing friction between the U.S. and China could hinder AI expansion in South Korea. Despite efforts to diversify chip exports away from China, the report notes that China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with the U.S. representing a similar percentage.
Bank of America analysts warned that if geopolitical tensions heighten and the U.S. imposes additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in this supply chain due to heightened tensions would complicate the ability of South Korean companies to acquire the essential tools needed for semiconductor manufacturing.
The U.S. has reportedly requested that South Korea 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 considering this request, bearing in mind the potential consequences for major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In response to these dynamics, the Biden administration is said to be contemplating the implementation of an export control mechanism called the foreign direct product rule. This rule would prohibit the export of goods manufactured with a specified percentage of U.S. intellectual property components to any country.