South Korea is one of the few economies globally experiencing a productivity surge attributed to artificial intelligence, although escalating U.S.-China tensions surrounding semiconductors could pose significant challenges to its growth, analysts from Bank of America have indicated.
The semiconductor sector constitutes 17% of South Korea’s exports, with the country emerging as a major beneficiary of the AI boom, as exports have risen by over 50% year-over-year. According to a report from Bank of America Global Research, South Korea’s substantial investment in AI research and development, alongside an increasing number of AI-related patents, is expected to bolster its position in AI adoption in the long run.
Despite these advancements, analysts warn that potential geopolitical tensions could exert pressure on the semiconductor supply chain, particularly in light of the escalating friction between the U.S. and China, which could hinder AI growth in South Korea. Although South Korea has taken steps to diversify its chip exports away from China, the report noted that China and Hong Kong accounted for over 30% of its chip exports in 2023, with exports to the U.S. being roughly equivalent.
Bank of America analysts caution that should geopolitical conflicts intensify and the U.S. impose further trade restrictions on exports of advanced or AI-related chips to China, it could significantly impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Disruptions in this supply chain due to rising tensions could hinder South Korean firms’ ability to obtain the necessary tools for chip production.
Reports suggest that the U.S. has urged South Korea to limit exports to China of equipment and technology for memory chips and advanced logic chips, specifically those employing technology more advanced than 14-nanometer for logic chips and beyond 18-nanometer for DRAM memory chips. South Korean officials are reportedly contemplating the U.S. request, considering the potential ramifications for major South Korean companies like Samsung and SK Hynix, which have operations in China, its largest trading partner.
In parallel, the Biden administration is reportedly exploring the implementation of an export control mechanism known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods to any nation if they are manufactured using a specific percentage of components that incorporate U.S. intellectual property.