South Korea stands out as one of the few economies globally experiencing a productivity increase due to advancements in artificial intelligence, according to analysts at Bank of America. However, escalating tensions between the U.S. and China regarding semiconductors could pose significant challenges to the country’s growth.
The semiconductor sector is critical for South Korea, accounting for 17% of its exports. A report by Bank of America Global Research indicates that the nation is reaping huge benefits from the AI surge, with semiconductor exports surging more than 50% year-over-year. Long-term prospects for South Korea are bolstered by high investments in AI research and development, alongside a rising number of patents related to AI, which could further enhance its standing in the AI landscape.
Despite this positive outlook, the report cautions that geopolitical tensions, particularly between the U.S. and China, could disrupt the semiconductor supply chain, thereby impacting AI development in South Korea. Although the country has started diversifying its chip exports away from China, over 30% of its chip exports still went to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar share.
Bank of America analysts warn that should U.S.-China tensions escalate and lead to additional trade restrictions on exports of advanced or AI-related chips to China, it could significantly impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for various components and equipment vital for chip production. Any disruptions in supplies stemming from geopolitical tensions could hinder South Korean companies’ ability to procure the necessary tools for manufacturing.
The U.S. government has reportedly requested that South Korea impose restrictions on exports to China regarding equipment and technology used for producing memory chips and advanced logic chips, particularly those more complex than 14-nanometer and 18-nanometer DRAM chips. South Korean officials are contemplating this request due to its potential impact on major firms like Samsung and SK Hynix, which have significant operations in China, its top trading partner.
In the meantime, the Biden administration is considering implementing an export control known as the foreign direct product rule on allied nations that continue to sell chipmaking tools and equipment to China. This regulation would prevent the export of any goods made with a certain percentage of U.S. intellectual property to any country.