South Korea is experiencing a significant productivity boost from artificial intelligence, distinguishing it from many other global economies. However, analysts from Bank of America caution that rising U.S.-China tensions over semiconductor trade could impede the country’s growth prospects.
The semiconductor sector is crucial for South Korea, representing 17% of its exports. According to a report from Bank of America Global Research, South Korea has emerged as a primary beneficiary of the AI surge, seeing a year-over-year increase of over 50% in exports. 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 the adoption of AI technologies.
Nonetheless, the analysts indicated that potential geopolitical challenges could impact the semiconductor supply chain, particularly due to escalating tensions between the U.S. and China, which could present obstacles to AI growth in South Korea. Despite efforts to shift chip exports away from China, the report states that China and Hong Kong collectively accounted for more than 30% of South Korea’s chip exports in 2023, with exports to the United States being similar.
The analysts warned that should geopolitical conflicts worsen, particularly if the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely disrupt South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Consequently, any disruptions in the supply chain due to rising tensions could hinder their ability to obtain necessary production tools.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean authorities are considering the U.S. request, mindful of the potential consequences for major South Korean corporations like Samsung and SK Hynix, which maintain operations in China, its largest trading partner.
At the same time, the Biden administration is reportedly contemplating the application of an export control known as the foreign direct product rule on allied nations that continue supplying chipmaking tools and equipment to China. This regulation would prevent the export of any good to any country if it incorporates a certain percentage of U.S. intellectual property components in its manufacturing.