South Korea stands out as one of the few economies globally that is witnessing increased productivity attributed to artificial intelligence (AI), although potential challenges loom due to escalating U.S.-China tensions concerning semiconductor technology, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, with the nation emerging as a leading beneficiary of the AI surge, as exports surged by over 50% compared to the previous year, as noted in a report from Bank of America Global Research. Analysts are optimistic about South Korea’s future, highlighting its substantial investments in AI research and development and an increasing number of AI-related patents, which they believe will enhance the nation’s AI adoption.
Despite this positive outlook, analysts caution that geopolitical strains, particularly the rising discord between the U.S. and China, could impact the semiconductor supply chain and hinder South Korea’s AI growth. Although South Korea has made strides to shift its chip exports away from China towards other markets, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar portion sent to the U.S.
Analysts from Bank of America warned that any escalation in geopolitical tensions, especially if the U.S. imposes further trade restrictions on advanced and AI-related chip exports to China, could severely affect South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for essential components and equipment for chip production. This dependence means that any disruptions in the supply chain due to elevated tensions would hinder South Korean firms’ abilities to procure the necessary tools for chip manufacturing.
The United States has reportedly requested South Korea to limit exports to China of equipment and technologies used for producing memory and advanced logic chips, particularly those more advanced than 14 nanometers and DRAM chips exceeding 18 nanometers. South Korean officials are said to be considering this request, taking into account the potential impacts on major firms like Samsung and SK Hynix, which have significant operations in China, its largest trade partner.
In a related development, the Biden administration is contemplating implementing an export control known as the foreign direct product rule. This regulation would prevent the export of any goods to any nation if those goods are manufactured using a specific percentage of U.S. intellectual property.