South Korea stands out as one of the few economies experiencing a productivity boost due to artificial intelligence, according to analysts from Bank of America. However, rising tensions between the U.S. and China over semiconductor trade could pose threats to South Korea’s growth.
The semiconductor sector is crucial for South Korea, accounting for 17% of its exports. A report from Bank of America Global Research notes that the nation has significantly benefited from the AI boom, with exports rising by over 50% year-over-year. Analysts are optimistic about South Korea’s long-term prospects, citing its substantial investments in AI research and development, along with an increasing number of AI-related patents, which should enhance its position in AI utilization.
Despite this positive outlook, analysts caution that geopolitical tensions may impact the semiconductor supply chain. The ongoing friction between the U.S. and China could challenge South Korea’s growth in AI. Although South Korea has shifted some of its chip exports away from China to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, which is comparable to exports destined for the U.S.
Should U.S.-China tensions escalate, the U.S. could impose further trade restrictions on advanced chips exported to China, a move that could significantly harm South Korea’s memory semiconductor exports. Additionally, Korean chip manufacturers rely on China for various components and equipment essential for chip production. Any disruption to this supply chain would complicate the ability of South Korean companies to obtain the necessary tools for manufacturing chips.
The U.S. has reportedly requested that South Korea limit exports to China of technology and equipment used in the production of memory chips and advanced logic chips, specifically those exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean authorities are contemplating this request due to the potential impact on major corporations like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Meanwhile, the Biden administration is considering implementing the foreign direct product rule as an export control measure against allies that continue to supply chipmaking tools and equipment to China. This rule restricts the export of goods manufactured with a specified percentage of U.S. intellectual property to any country.