South Korea stands out as one of the few economies globally experiencing a productivity surge due to artificial intelligence, though escalating U.S.-China tensions regarding semiconductor chips may pose significant challenges to its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s total exports, and the country has emerged as a major beneficiary of the AI boom, witnessing a more than 50% increase in exports year-over-year. Bank of America Global Research anticipates that ongoing high levels of investment in AI research and development, alongside a rising number of AI-related patents, will reinforce South Korea’s position in AI adoption.
Nonetheless, analysts caution that geopolitical tensions could disrupt the semiconductor supply chain. The intensifying rivalry between the U.S. and China could impede AI-related growth in South Korea. Even with South Korea’s efforts to diversify its chip exports away from China, over 30% of its chip exports were directed to China and Hong Kong in 2023, with similar figures for exports to the U.S.
Bank of America analysts expressed concerns that if geopolitical tensions escalate and the U.S. enforces additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment crucial for chip production. Any disruption in this supply chain due to heightened tensions could hinder South Korean companies’ ability to obtain necessary production tools.
Reports indicate that the U.S. has requested South Korea to impose restrictions on exports to China of equipment and technology related to memory chips and advanced logic chips, particularly those beyond 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are reportedly considering this request, weighing potential consequences for prominent firms like Samsung and SK Hynix, which have significant operations in China—its primary trading partner.
In parallel, the Biden administration is contemplating the implementation of an export regulation known as the foreign direct product rule, aimed at allies who continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any goods containing a specified percentage of U.S. intellectual property to any country.