South Korea is one of the few economies globally experiencing a productivity boost from artificial intelligence, although U.S.-China tensions over semiconductor technology could pose risks to its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, with the country identified as the largest beneficiary of the AI surge, enjoying over a 50% increase in exports year-over-year, as highlighted in a Bank of America Global Research report. Analysts express optimism about South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, which they believe will strengthen the nation’s position in AI adoption over time.
Nonetheless, the report warns that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly due to increasing friction between the U.S. and China, which could challenge AI growth in South Korea. While the country has successfully diversified its chip exports beyond China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with U.S. exports being similar.
Should U.S.-China tensions escalate and the U.S. implement further trade restrictions on advanced or AI-related chip exports to China, Bank of America analysts caution that this could severely impact memory semiconductor exports from South Korea.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Consequently, disruptions to the supply chain resulting from geopolitical tensions could hinder these firms’ ability to obtain the essential tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology used for producing memory and advanced logic chips to China, specifically targeting chips more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly considering this U.S. request, given its potential implications for major companies such as Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
In the meantime, the Biden administration is contemplating the application of an export control measure known as the foreign direct product rule on nations that continue selling chip manufacturing tools and equipment to China. This regulation would prevent the export of any goods to any country if they are produced using a specific percentage of U.S. intellectual property components.