Bank of America analysts have highlighted that South Korea is experiencing a productivity increase due to artificial intelligence, making it one of the few economies worldwide benefiting from this technology. However, rising U.S.-China tensions regarding semiconductors could pose challenges to the country’s growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI surge, with exports climbing over 50% year-over-year, as reported by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, alongside a rising number of AI-related patents, will enhance its position in AI adoption over the long term.
Nevertheless, the analysts warned that geopolitical tensions might impact the semiconductor supply chain. The growing friction between the U.S. and China could hinder AI growth in South Korea. Despite efforts to diversify chip exports beyond China, over 30% of the country’s chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being roughly equivalent.
The analysts noted that should geopolitical disputes intensify and the U.S. impose further trade restrictions on advanced or AI-related chip exports to China, it could severely affect Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for vital chipmaking components and equipment. Thus, any disruptions in this supply chain due to rising tensions would complicate the ability of South Korean firms to access necessary tools for chip production.
Reports indicate that the U.S. has urged South Korea to limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, particularly those with specifications exceeding 14-nanometers for logic chips and 18-nanometers for DRAM memory chips. South Korean officials are reportedly considering this request, taking into account potential repercussions for key domestic firms like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating employing an export control measure known as the foreign direct product rule against allies that persist in supplying chipmaking tools and equipment to China. This regulation prevents the export of goods to any country if they are produced with a specific percentage of U.S. intellectual property.