South Korea stands out as one of the few economies benefiting from a productivity increase linked to artificial intelligence, although analysts from Bank of America caution that escalating U.S.-China tensions over semiconductors may hinder its growth.
According to a report by Bank of America Global Research, the semiconductor sector is vital for South Korea, comprising 17% of its total exports. The nation’s exports have surged by over 50% year-over-year, benefiting greatly from the AI boom. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will strengthen its leadership in AI adoption moving forward.
However, the report also indicates that geopolitical tensions could impact the semiconductor supply chain, particularly the strife between the U.S. and China. Although South Korea has begun to diversify its chip exports beyond China, over 30% of its semiconductor exports in 2023 were still directed to China and Hong Kong, which is comparable to the export volume to the U.S.
Analysts from Bank of America warned that if geopolitical tensions escalate and the U.S. imposes further restrictions on exports of advanced or AI-related chips to China, it could greatly affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for several components and equipment essential for chip production. Any disruption in the supply chain due to rising tensions would complicate South Korean companies’ access to the necessary tools for chip manufacturing.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, specifically those surpassing 14-nanometer and 18-nanometer technologies. South Korean officials are reportedly deliberating on the U.S. request, considering potential impacts on major corporations like Samsung and SK Hynix, which have significant operations in China, its largest trade partner.
At the same time, the Biden administration is reportedly contemplating the imposition of an export control known as the foreign direct product rule on allies who continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods to any country if they are manufactured using a specific percentage of U.S. intellectual property components.