Bank of America analysts have noted that South Korea stands out as one of the few economies reaping productivity gains from artificial intelligence. However, the ongoing tensions between the U.S. and China regarding semiconductor supply chains may pose challenges to the country’s growth prospects.
The semiconductor sector plays a crucial role in South Korea’s economy, accounting for 17% of its total exports. According to a recent report from Bank of America Global Research, South Korea has emerged as a leading beneficiary of the AI surge, with exports in this sector rising over 50% year-over-year. The analysts suggest that South Korea’s substantial investments in AI research and development, coupled with an increasing number of AI-related patents, will solidify its standing in AI technology adoption in the long term.
Still, the report cautions that geopolitical tensions could create obstacles for the semiconductor supply chain in South Korea, particularly due to the escalating conflicts between the U.S. and China. Although the country has made efforts to diversify its chip exports away from China, it still relied on China and Hong Kong for more than 30% of its chip exports in 2023, with exports to the U.S. being approximately equal.
Analysts warn that if geopolitical risks heighten and the U.S. imposes stricter trade restrictions on advanced chips destined for China, it could notably impact South Korea’s semiconductor exports. Additionally, South Korean manufacturers currently depend on China for certain essential components and equipment used in chip production, making them vulnerable to any disruptions in the supply chain arising from these tensions.
Reports indicate that the U.S. has urged South Korea to limit exports of chipmaking technology and equipment to China, particularly for advanced logic chips exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request, keeping in mind potential repercussions for major domestic players like Samsung and SK Hynix, which operate significant businesses in China.
In parallel, the Biden administration is contemplating applying an export control measure known as the foreign direct product rule to allied nations that continue to sell chip manufacturing tools to China. This rule would restrict any good from being exported if it’s made using a specified percentage of U.S. intellectual property.
Overall, South Korea’s future in the AI sector may hinge on navigating these complex geopolitical landscapes. The country’s proactive approach toward AI innovation and production potential is promising, yet its dependence on the semiconductor supply chain requires careful oversight as the global technological competition evolves.
This situation reflects the interconnectedness of global economies and underscores the importance of navigating international relations effectively to harness opportunities while mitigating risks.