South Korea stands out as one of the few economies benefiting from a productivity boost linked to artificial intelligence (AI), although escalating tensions between the U.S. and China over semiconductor supplies could pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector comprises 17% of South Korea’s exports, with the nation emerging as a major beneficiary of the AI surge, reporting over a 50% increase in exports year-over-year, as highlighted in a report by Bank of America Global Research. Looking forward, analysts expect that South Korea’s substantial investments in AI research and development and a rising number of AI-related patents will further enhance its role in AI technology adoption.
Nonetheless, analysts caution that potential geopolitical conflicts may disrupt the semiconductor supply chain, particularly amid increasing U.S.-China tensions. Although South Korea has managed to diversify its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar amount shipped to the U.S.
Should geopolitical frictions escalate and the U.S. implement tighter trade restrictions on advanced or AI-related chip exports to China, South Korean memory semiconductor exports could face serious setbacks, the Bank of America analysts warned.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in this supply chain due to rising tensions could complicate South Korean companies’ access to essential tools for chip manufacturing.
The U.S. has reportedly urged South Korea to limit exports to China of technology and equipment for producing memory and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer technology. South Korean officials are contemplating this request, mindful of the potential impact on major firms like Samsung and SK Hynix, which have operations in China — their largest trading partner.
In a related development, the Biden administration is considering applying a foreign direct product rule that would control exports to allies continuing to supply chip-making tools and equipment to China. This regulation would prevent the export of any goods produced with a defined proportion of U.S. intellectual property components to any country.