South Korea stands out as one of the few economies globally experiencing a productivity increase due to artificial intelligence, although rising U.S.-China tensions regarding semiconductors may pose risks to its growth, according to Bank of America analysts.
The semiconductor sector comprises 17% of South Korea’s exports, and the nation has seen significant gains from the AI boom, with exports rising by over 50% year-on-year, as noted in a report from Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, along with a growing number of AI-related patents, will reinforce its position in AI integration in the long run.
However, the potential for geopolitical conflicts could impact the semiconductor supply chain. The escalating tensions between the U.S. and China could present challenges for AI advancement in South Korea. Although the country has shifted its chip export markets away from China towards other regions, more than 30% of its chip exports in 2023 were to China and Hong Kong, which is similar to the percentage exported to the U.S.
Bank of America analysts warned that if geopolitical tensions heighten and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. This dependency means that any disruption to the supply chain caused by escalating tensions would complicate access for South Korean companies to essential tools for chip production.
There have been reports that the U.S. has requested South Korea to limit exports to China of machinery and technology used in the manufacture of memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are reportedly deliberating this request due to the potential impact on major firms such as Samsung and SK Hynix, both of which operate in China, South Korea’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating the application of an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This regulation prohibits the export of any product to a country if it incorporates a specific percentage of U.S. intellectual property.