South Korea is one of the few economies benefiting from increased productivity due to artificial intelligence, though tensions between the U.S. and China regarding semiconductors could pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a major beneficiary of the AI surge, with exports rising by over 50% year-on-year, as highlighted in a Bank of America Global Research report. Analysts predict that South Korea’s substantial investments in AI research and development, alongside a growing portfolio of AI-related patents, will enhance its standing in AI adoption in the long run.
Nevertheless, the report warns that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly amid the escalating friction between the U.S. and China. While South Korea has begun diversifying its chip exports beyond China, over 30% of its chip exports in 2023 were directed to China and Hong Kong, which is comparable to exports to the United States.
If geopolitical tensions escalate and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, Bank of America analysts cautioned that it could significantly impact Korea’s memory semiconductor exports.
South Korean chip manufacturers rely on China for various chip-making components and equipment, meaning supply chain disruptions could complicate their ability to obtain essential tools for chip production.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly deliberating on this request, considering the implications for major firms like Samsung and SK Hynix, which have operations in China, its top trading partner.
Additionally, the Biden administration is considering implementing an export control known as the foreign direct product rule on allies that continue supplying chip-making tools and equipment to China. This rule would restrict exports to any country if the goods are produced with a specific percentage of U.S. intellectual property components.