South Korea stands out as one of the few economies globally experiencing a productivity enhancement through artificial intelligence, though rising U.S.-China tensions regarding semiconductors could pose a risk to its growth, analysts from Bank of America indicate.
The semiconductor sector represents 17% of South Korea’s exports, and according to a report from Bank of America Global Research, the nation has emerged as the primary beneficiary of the AI surge, with exports increasing by over 50% year-on-year. Analysts believe that South Korea’s significant investment in AI research and development, coupled with a growing array of AI-related patents, will bolster its position in adopting AI technologies in the long run.
However, the report cautions that escalating geopolitical tensions could impact the semiconductor supply chain, particularly the deteriorating relationship between the U.S. and China, which may challenge AI development in South Korea. Although the country has diversified its chip exports away from China, more than 30% of its chip exports in 2023 were directed to China and Hong Kong, with similar figures for exports to the U.S.
Bank of America analysts warned that if geopolitical tensions worsen and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could considerably hinder memory semiconductor exports from South Korea.
Additionally, South Korean chip manufacturers rely on China for specific components and equipment essential for chip production. Any disruptions in these supply chains due to geopolitical tensions would complicate the ability of South Korean companies to acquire necessary manufacturing tools.
As part of its strategy, the U.S. has reportedly urged South Korea to limit exports to China of equipment and technology utilized in the production of memory chips and advanced logic chips, particularly those exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer technology. South Korean officials are reportedly considering the U.S. request, given the potential consequences for major South Korean corporations like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Meanwhile, the Biden administration is reportedly exploring the application of an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any product to any country if it contains a certain percentage of U.S. intellectual property components.