South Korea stands out as one of the few economies worldwide experiencing a productivity surge due to artificial intelligence, although analysts from Bank of America caution that rising U.S.-China tensions regarding semiconductor chips could pose a threat to this growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports. The nation has emerged as a major beneficiary of the AI boom, with exports increasing by over 50% year-on-year. The analysts believe that South Korea’s significant investments in AI research and development, coupled with an increasing number of AI-related patents, will enhance its standing in AI implementation in the long run.
Nonetheless, the analysts warn that geopolitical strains, particularly the escalating discord between the U.S. and China, could impact the semiconductor supply chain and, consequently, hinder AI progress in South Korea. Although South Korea has redirected its chip exports away from China towards other regions, China and Hong Kong still accounted for more than 30% of its chip exports in 2023, similar to the percentage of exports directed to the U.S.
Bank of America analysts noted that should geopolitical tensions intensify, particularly if the U.S. enforces stricter trade sanctions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory chip exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment essential to chip production. Disruptions in these supply chains due to geopolitical conflicts would make it increasingly challenging for South Korean companies to obtain the necessary tools for chip manufacturing.
In addition, reports indicate that the U.S. has requested South Korea to limit the export of equipment and technology to China that are used in manufacturing memory chips and advanced logic chips, specifically those with cutting-edge specifications beyond 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request due to potential consequences for major local companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Meanwhile, the Biden administration is also contemplating the implementation of an export control mechanism known as the foreign direct product rule for allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods produced with a specific percentage of U.S. intellectual property components to any nation.