South Korea is emerging as one of the few economies benefitting from a productivity increase linked to artificial intelligence, although tensions between the U.S. and China regarding semiconductor supplies may threaten this growth, according to analysts from Bank of America.
As Nvidia’s stock faces significant fluctuations this week, the Bank of America Global Research report highlights that the semiconductor sector represents 17% of South Korea’s exports. The country has become the leading beneficiary of the AI surge, with exports rising over 50% year-over-year. Analysts believe that sustained investments in AI research and development, along with a growing number of AI-related patents, will strengthen South Korea’s position in the adoption of artificial intelligence.
Nonetheless, the report warns that ongoing geopolitical strains, particularly between the U.S. and China, could disrupt the semiconductor supply chain, posing a risk to AI growth in South Korea. Although the nation has begun diversifying its chip exports beyond China, over 30% of its chip exports still went to China and Hong Kong in 2023, similar to the percentage exported to the U.S.
Bank of America analysts noted that should geopolitical tensions intensify and the U.S. implement further trade restrictions on the export of advanced or AI-related chips to China, this could severely impact South Korea’s memory chip exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Should tensions disrupt these supply chains, accessing the tools needed to manufacture chips could become increasingly challenging for South Korean companies.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology for producing memory chips and advanced logic chips, specifically for chips more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are evaluating the U.S. request, considering potential repercussions for major firms like Samsung and SK Hynix that operate in China, South Korea’s largest trading partner.
In a related development, 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 chip manufacturing equipment to China. This rule prohibits the export of goods to any country if they are manufactured using a substantial percentage of U.S. intellectual property components.