South Korea is currently one of the few economies benefiting from a productivity increase attributed to artificial intelligence, though Bank of America analysts warn that U.S.-China tensions over semiconductor chips could pose a risk to this growth.
The semiconductor sector is crucial for South Korea, representing 17% of its exports. According to a report from Bank of America Global Research, the nation has emerged as the largest benefactor of the AI boom, experiencing over a 50% increase in exports year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will strengthen its role in AI adoption over the long term.
However, the report highlights concerns that geopolitical tensions may impact the semiconductor supply chain, particularly the ongoing friction between the U.S. and China, which could hinder AI growth 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 similar levels directed to the U.S.
Bank of America analysts caution that if geopolitical tensions escalate and the U.S. implements further trade restrictions on exports of advanced or AI-related chips to China, it could severely damage South Korea’s memory chip exports. Additionally, South Korean chip makers rely on China for certain components and equipment, meaning that any disruption in the supply chain could hinder their ability to produce chips.
Reports suggest that the U.S. has urged South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, specifically targeting logic chips that exceed 14-nanometer technology and DRAM memory chips beyond 18-nanometer technology. South Korean officials are considering the U.S. request, weighing it against potential consequences for major South Korean companies, including Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Concurrent with this, the Biden administration is reportedly contemplating the use of an export control known as the foreign direct product rule against allies that continue selling chipmaking tools and equipment to China. This rule would prohibit the export of any goods to a country if they are produced with a specific percentage of U.S. intellectual property components.