South Korea stands out as one of the few economies experiencing a productivity surge due to artificial intelligence (AI), though rising tensions between the U.S. and China regarding semiconductor chips present potential growth challenges, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has been labeled the largest beneficiary of the AI boom, with its exports increasing by over 50% year-over-year, as highlighted in a report by Bank of America Global Research. Analysts believe that South Korea’s significant investments in AI research and development, alongside an increasing number of AI-related patents, will enhance its position in AI adoption in the long run.
Despite these positive trends, potential geopolitical conflicts could impact the semiconductor supply chain, particularly amid escalating tensions between the U.S. and China. Although South Korea has diversified its chip exports beyond China, over 30% of its chip exports in 2023 were directed to China and Hong Kong, with similar figures for U.S. exports.
The analysts warned that if geopolitical tensions escalate and the U.S. imposes stricter trade controls on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Should tensions disrupt the supply chain, acquiring the essential tools for chip manufacturing could become more challenging.
The U.S. has reportedly requested South Korea to limit its exports to China of equipment and technology used for producing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, weighing the potential implications for major companies like Samsung and SK Hynix, which have operations in China, their largest trading partner.
Furthermore, the Biden administration is reportedly contemplating implementing an export control known as the foreign direct product rule, aimed at allies that continue to sell chipmaking tools to China. This rule would prohibit the export of any products that are manufactured with a certain percentage of U.S. intellectual property components.