South Korea is currently one of the few economies worldwide experiencing a productivity increase driven by artificial intelligence, although escalating U.S.-China tensions over semiconductor technology may pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has been identified as a significant beneficiary of the AI growth wave, with exports having surged by over 50% on a year-over-year basis, as highlighted in a recent report by Bank of America Global Research. Analysts predict that South Korea’s substantial investment in AI research and development, coupled with an increase in AI-related patents, will continue to enhance its standing in AI adaptation.
Nonetheless, analysts caution that rising geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain, potentially hindering AI growth in South Korea. Although the country has made strides to diversify its chip exports away from China to other regions, more than 30% of its chip exports in 2023 still went to China and Hong Kong, which is comparable to its exports to the U.S.
If geopolitical conflicts intensify and the U.S. were to impose further trade restrictions on advanced or AI-related semiconductor exports to China, Bank of America warns that this could severely affect South Korea’s memory chip exports. Additionally, South Korean semiconductor manufacturers rely on China for various chipmaking components and equipment. Thus, any disruptions in the supply chain resulting from geopolitical tensions could complicate their ability to acquire the necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports of equipment and technology intended for memory chips and advanced logic chips to China, specifically for chips that are more advanced than 14-nanometers, as well as DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly deliberating on this request due to potential impacts on major South Korean companies like Samsung and SK Hynix, both of which operate in China, its biggest trading partner.
In parallel, the Biden administration is said to be contemplating the implementation of an export control mechanism called the foreign direct product rule. This regulation would prevent the export of any product to any country if that product is manufactured using a specific percentage of U.S. intellectual property components, targeting allies that continue to supply chipmaking tools and equipment to China.