South Korea stands out as one of the few economies experiencing a productivity increase driven by artificial intelligence, according to analysts from Bank of America. However, they warn that rising tensions between the U.S. and China concerning the semiconductor industry could hinder South Korea’s growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a primary beneficiary of the AI boom, with exports increasing over 50% year-on-year. Bank of America Global Research anticipates that South Korea’s significant investments in AI research and development, along with a surge in AI-related patents, will solidify its leadership in AI adoption.
Nonetheless, the analysts caution that rising geopolitical tensions could impact the semiconductor supply chain, particularly due to the escalating conflict between the U.S. and China. Although South Korea has diversified its chip exports away from China, the two countries, along with Hong Kong, accounted for more than 30% of its chip exports in 2023, with exports to the U.S. being roughly equivalent.
The report highlights that if geopolitical disputes intensify and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports. South Korean chip manufacturers also rely on China for certain components and equipment necessary for chip production. Disruptions in this supply chain could complicate South Korean firms’ abilities to produce chips effectively.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used in manufacturing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly evaluating the U.S. request due to potential consequences for major firms like Samsung and SK Hynix, which have substantial operations in China, its largest trading partner.
Meanwhile, the Biden administration is said to be contemplating the application of an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This regulation would prevent the export of any goods to any country if they are produced with a certain percentage of U.S. intellectual property components.