South Korea is emerging as one of the few economies benefiting from a productivity increase linked to artificial intelligence, although rising U.S.-China tensions regarding semiconductor chips may pose risks to its economic growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, with the nation reportedly experiencing a significant surge in exports, increasing over 50% year-on-year, attributed to the AI boom. Analysts from Bank of America Global Research anticipate that South Korea’s substantial investment in AI research and development and its increasing number of AI-related patents will enhance its position in AI integration in the future.
However, the report warns that escalating geopolitical tensions could negatively impact the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China. Despite efforts from South Korea to diversify its semiconductor exports away from China to other regions, China and Hong Kong still accounted for over 30% of South Korea’s chip exports in 2023, which is a comparable rate for the U.S. as well.
The analysts noted that if geopolitical tensions intensify and the United States implements further trade restrictions on advanced or AI-related chip exports to China, it could have a significant detrimental effect on South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Any disruptions to these supply chains due to heightened tensions could hinder South Korean companies’ ability to obtain the essential tools needed for semiconductor manufacturing.
The U.S. has reportedly requested that South Korea limit exports to China of technologies and equipment used for producing memory and advanced logic chips, particularly those exceeding 14-nanometer technology and DRAM chips beyond 18-nanometer. South Korean authorities are said to be considering the U.S. request due to potential implications for major companies like Samsung and SK Hynix, which have significant operations in China, South Korea’s primary trading partner.
Meanwhile, the Biden administration is reportedly contemplating the use of an export control mechanism known as the foreign direct product rule against allies that continue to sell chipmaking tools and equipment to China. This rule prohibits the export of any goods to any nation if they are produced using a specified percentage of U.S. intellectual property components.