South Korea stands out as one of the few economies worldwide experiencing a productivity increase driven by artificial intelligence, although tensions between the U.S. and China over semiconductor issues could hinder its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has been a significant beneficiary of the AI boom, with a reported year-over-year increase in exports exceeding 50%. Analysts from Bank of America Global Research highlighted that South Korea’s substantial investments in AI research and development, as well as a rise in AI-related patent registrations, are likely to enhance its status in AI adoption moving forward.
Nonetheless, analysts caution that potential geopolitical tensions could impact the semiconductor supply chain, particularly the escalating conflict between the U.S. and China, which presents challenges to AI growth in South Korea. While the country 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 exports to the U.S. approximating the same figure.
Bank of America analysts warned that if geopolitical tensions intensify and the U.S. imposes further trade limitations on the export of advanced or AI-related chips to China, it could significantly affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Disruptions in supply chains due to heightened tensions could complicate matters for South Korean companies seeking essential tools needed for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology to China that is used in producing memory chips and advanced logic chips, specifically targeting logic chips more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly deliberating the U.S. request, considering the potential impact on major South Korean firms like Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
In parallel, the Biden administration is contemplating employing an export control known as the foreign direct product rule on allies that continue to provide chipmaking tools and equipment to China. This rule prohibits the export of any goods to any nation if they are manufactured using a specified percentage of U.S. intellectual property components.