South Korea stands out as one of the few economies experiencing a productivity surge linked to artificial intelligence (AI), although tensions between the U.S. and China regarding semiconductor technology could pose risks to its growth, according to analysts at Bank of America.
The semiconductor sector plays a crucial role in South Korea’s economy, contributing to 17% of its exports. Bank of America Global Research reports that the country has emerged as a major beneficiary of the AI boom, with exports increasing by over 50% compared to the previous year. Analysts believe that South Korea’s substantial investments in AI research and development, alongside a rising number of AI-related patents, will bolster its position in AI advancement in the long run.
Despite these positive trends, analysts caution that geopolitical tensions may complicate the semiconductor supply chain. The escalating discord between the U.S. and China could particularly challenge South Korea’s AI growth. Although South Korea has begun to diversify its chip exports away from China toward other regions, over 30% of its chip exports were still directed to China and Hong Kong in 2023, with exports to the U.S. at similar levels.
Bank of America analysts noted that if geopolitical tensions intensify and the U.S. enforces further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential components and equipment involved in chip production. Any disruption in the supply chain due to heightened tensions would hinder these companies’ ability to obtain the necessary tools for chip manufacturing.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, particularly those exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are considering the U.S. request, mindful of potential repercussions for major South Korean firms like Samsung and SK Hynix, both of which have significant operations in China.
In parallel, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of goods to any country manufactured with a certain percentage of U.S. intellectual property components.