South Korea stands out as one of the few economies globally experiencing a productivity increase due to artificial intelligence, though rising tensions between the U.S. and China over semiconductor issues could hinder its growth, according to analysts from Bank of America.
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The semiconductor sector is crucial for South Korea, constituting 17% of its total exports. Bank of America Global Research reports that the country has emerged as the biggest winner from the AI boom, with exports surging over 50% year-on-year. Looking ahead, analysts are optimistic about South Korea’s substantial investments in AI research and development and an increasing number of AI-related patents, which they believe will enhance its AI adoption capabilities.
However, the analysts warn that potential geopolitical tensions could impact the semiconductor supply chain. The escalating friction between the U.S. and China poses a specific challenge to South Korea’s AI growth. Despite diversifying its chip exports beyond China, the report indicates that more than 30% of its chip exports were delivered to China and Hong Kong in 2023, with a similar amount sent to the U.S.
If U.S.-China tensions worsen and the U.S. places additional trade restrictions on advanced or AI-related chip exports to China, this could significantly harm South Korea’s memory semiconductor exports, the analysts cautioned.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment used in chip production. Disruptions in the supply chain due to geopolitical tensions could hinder these firms’ access to essential manufacturing tools.
The U.S. has requested South Korea to limit exports to China of equipment and technology for producing memory chips and advanced logic chips. This includes specific restrictions on logic chips with technology more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly considering this request, mindful of its implications for major companies like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In addition, the Biden administration is contemplating the use of export controls under the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of goods to any country if they are made with a specified percentage of U.S. intellectual property components.