Bank of America analysts have highlighted that South Korea is among the few economies benefiting from a productivity increase driven by artificial intelligence. However, they caution that rising tensions between the U.S. and China over semiconductor supply could pose risks to South Korea’s growth in this area.
The semiconductor sector is crucial for South Korea, accounting for 17% of its exports. According to a recent report from Bank of America Global Research, South Korea has been the primary beneficiary of the AI boom, with a more than 50% year-over-year increase in exports. Analysts believe that South Korea’s robust investments in AI research and development, coupled with a surge in AI-related patents, will bolster its position in AI adoption in the long run.
Nevertheless, the analysts note that potential geopolitical conflicts could impact the semiconductor supply chain, particularly the escalating tensions between the U.S. and China. Despite diversifying chip exports beyond China, over 30% of South Korea’s semiconductor exports in 2023 were directed to China and Hong Kong, with exports to the U.S. being approximately equal.
The report warns that should geopolitical tensions intensify and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential chipmaking components and equipment. Disruptions in this supply chain could hinder their ability to produce chips effectively.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology necessary for producing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean policymakers are currently contemplating the U.S. request, considering the possible implications for major companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is reportedly evaluating the implementation of an export control mechanism known as the foreign direct product rule, which would target allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of any goods manufactured with a certain percentage of U.S. intellectual property to any country.