South Korea is one of the few economies worldwide experiencing a productivity increase due to artificial intelligence, though tensions between the U.S. and China regarding semiconductors may pose growth challenges, according to analysts from Bank of America.
The semiconductor sector makes up 17% of South Korea’s exports, and a recent report by Bank of America Global Research indicates that the country has greatly benefited from the AI boom, with exports rising over 50% year-over-year. Analysts forecast that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will continue to enhance its role in AI adoption.
However, the report warns that escalating geopolitical tensions could impact the semiconductor supply chain, particularly in light of the increasing strains between the U.S. and China. Despite South Korea’s efforts to diversify its chip exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong. Exports to the U.S. were approximately equal.
Bank of America analysts noted that if U.S.-China tensions heighten and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could significantly harm South Korean memory chip exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in supply chains due to heightened tensions could complicate South Korean companies’ access to essential manufacturing tools.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used in producing advanced logic chips and memory chips, specifically those more sophisticated than 14-nanometer and 18-nanometer processes, respectively. South Korean officials are reportedly considering the U.S. request carefully due to potential repercussions for major firms like Samsung and SK Hynix, which have operations in China, its largest trading partner.
Furthermore, reports suggest that the Biden administration is contemplating the application of an export control known as the foreign direct product rule to allies that continue supplying chipmaking tools and equipment to China. This regulation would prevent the export of any product to any country if it is manufactured with a certain percentage of U.S. intellectual property components.