South Korea stands out as one of the few economies globally experiencing a boost in productivity from artificial intelligence (AI), according to Bank of America analysts. However, escalating tensions between the U.S. and China over semiconductor supplies could pose a threat to this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, with the nation benefiting immensely from the AI surge, witnessing over a 50% year-over-year increase in exports, as detailed in a report by Bank of America Global Research. Analysts are optimistic that South Korea’s robust investment in AI research and development, combined with a rising number of AI-related patents, will enhance its position in AI implementation over the long term.
Nonetheless, the report warns that geopolitical tensions may impact the semiconductor supply chain, specifically the heightened conflict between the U.S. and China, which could hinder AI advancements in South Korea. Despite efforts to diversify export markets beyond China, over 30% of South Korea’s chip exports were directed to China and Hong Kong in 2023, with exports to the U.S. comprising a similar proportion.
Bank of America analysts caution that should geopolitical conflicts escalate and the U.S. impose new trade restrictions on exports of advanced or AI-related chips to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip producers rely on China for essential chip-making components and equipment. Any disruption in these supply chains due to rising tensions would complicate the procurement of necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports of equipment and technology for manufacturing memory chips and advanced logic chips, particularly those exceeding the 14-nanometer threshold for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are weighing this request, considering its implications for major companies like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Meanwhile, the Biden administration is contemplating invoking an export control measure known as the foreign direct product rule against allies that continue to supply chip-making tools and equipment to China. This rule prohibits the export of any products to other countries if they were manufactured using a specified percentage of U.S. intellectual property components.