According to Bank of America analysts, South Korea is one of the few economies globally experiencing productivity gains from artificial intelligence. However, escalating tensions between the U.S. and China regarding semiconductor chips may pose challenges to its growth.
The semiconductor sector represents 17% of South Korea’s total exports, and the country has emerged as a major beneficiary of the AI surge, with exports increasing over 50% year-on-year. Analysts believe that South Korea’s substantial investments in AI research and development and a rising number of AI-related patents will strengthen its position in AI adoption in the long run.
Despite this optimistic outlook, the analysts warned that geopolitical tensions could impact the semiconductor supply chain, particularly the increasing friction between the U.S. and China, which could hinder AI growth in South Korea. Although the country has shifted its chip export strategies away from China to other regions, China and Hong Kong accounted for over 30% of its chip exports in 2023, with exports to the U.S. being approximately the same.
The analysts noted, “If geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could significantly undermine South Korea’s memory semiconductor export market.”
Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Consequently, any disruption in the supply chain caused by escalating tensions would complicate the ability of South Korean companies to procure necessary tools for manufacturing chips.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, specifically those exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly deliberating this request due to potential impacts on major corporations such as Samsung and SK Hynix, which have operations in China, its largest trading partner.
Simultaneously, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any country if they are manufactured using a specified percentage of U.S. intellectual property components.