South Korea is among the few economies globally benefiting from a productivity increase driven by artificial intelligence. However, analysts from Bank of America caution that rising tensions between the U.S. and China regarding semiconductor chips could pose challenges to the country’s growth.
The semiconductor sector comprises 17% of South Korea’s exports, and according to a report from Bank of America Global Research, the nation has emerged as the leading beneficiary of the AI surge, with exports soaring over 50% year-on-year. Analysts believe that South Korea’s significant investments in AI research and development, along with a growing number of AI-related patents, will continue to strengthen its position in AI adoption in the long run.
Nevertheless, potential geopolitical conflicts, particularly between the U.S. and China, could impact the semiconductor supply chain, which may hinder AI growth in South Korea. Although the country has diversified its chip exports beyond China to other regions, over 30% of its chip exports still went to China and Hong Kong in 2023, according to the report. Exports to the U.S. accounted for a similar percentage.
Bank of America analysts noted that if U.S. geopolitical tensions escalate and new trade restrictions on advanced or AI-related chip exports to China are imposed, this could significantly harm South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could complicate access to these essential tools for South Korean companies.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology to China used in the production of memory chips and advanced logic chips, particularly those with specifications more advanced than 14-nanometers for logic chips and beyond 18-nanometers for DRAM memory chips. South Korean officials are reportedly considering this request, given potential repercussions for major firms like Samsung and SK Hynix, which have operations in China, its largest trading partner.
In related developments, the Biden administration is said to be contemplating the implementation of an export control known as the foreign direct product rule against allies that continue supplying chipmaking tools and equipment to China. This rule would restrict the export of goods to any country if they are manufactured using a significant percentage of U.S. intellectual property components.