South Korea is currently one of the few economies globally experiencing a productivity increase due to artificial intelligence, according to Bank of America analysts. However, they warn that escalating tensions between the U.S. and China over semiconductor issues could hinder this growth.
The semiconductor sector comprises 17% of South Korea’s exports, with the country reportedly benefiting significantly from the AI surge, leading to a year-over-year increase of over 50% in exports. Analysts believe that South Korea’s substantial investments in AI research and development, alongside a growing number of related patents, will likely bolster its role in AI adoption moving forward.
Despite these optimistic forecasts, analysts caution that geopolitical tensions could negatively impact the semiconductor supply chain. The ongoing strained relations between the U.S. and China pose a particular risk to South Korea’s AI growth. Although South Korea has worked to diversify its chip exports beyond China, more than 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being similar.
Bank of America’s analysts noted that if geopolitical tensions escalate and the U.S. imposes additional trade restrictions on advanced or AI-related chip exports to China, it could significantly damage South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for certain components and equipment needed for chip production. Disruption in the supply chain due to rising tensions may hinder South Korean firms’ ability to acquire essential tools for chip manufacturing.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology necessary for producing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer logic chips and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, mindful of potential repercussions on major domestic firms such as Samsung and SK Hynix, which have operations in China—the largest trading partner of South Korea.
Additionally, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule against allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any nation if those goods contain a specified percentage of U.S. intellectual property components.