South Korea is experiencing a unique productivity increase attributed to artificial intelligence, although rising tensions between the U.S. and China regarding semiconductor supplies may challenge its growth prospects, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s export market, and recent findings from a Bank of America Global Research report indicate that the country has emerged as a significant beneficiary of the AI surge, with exports increasing by over 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its position in AI adoption in the future.
Despite these positive indicators, the report cautions that potential geopolitical conflicts could disrupt the semiconductor supply chain, particularly in light of the escalating tensions between the U.S. and China. While South Korea has diversified its chip exports beyond China to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with another similar proportion going to the U.S.
Bank of America analysts warned that if geopolitical tensions worsen and the U.S. imposes further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Consequently, any disruption in these supply chains due to heightened tensions would complicate the ability of South Korean firms to obtain the necessary tools for manufacturing chips.
On another front, the U.S. has reportedly urged South Korea to limit exports of equipment and technology that are vital for producing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM memory chips greater than 18-nanometer. South Korean officials are evaluating this request, mindful of potential impacts on major South Korean companies such as Samsung and SK Hynix, which maintain operations in China, its largest trading partner.
Furthermore, the Biden administration is considering the imposition of export controls, utilizing the foreign direct product rule against allies that continue supplying chipmaking equipment to China. This rule would prevent the export of any goods produced with a certain percentage of U.S. intellectual property to any country.