South Korea is emerging as one of the few economies worldwide experiencing a productivity boost from artificial intelligence, although tensions between the U.S. and China over semiconductor technology might pose challenges to its economic growth, according to analysts at Bank of America.
The semiconductor sector makes up 17% of South Korea’s total exports, and the country has notably benefited from the AI surge, with exports reportedly increasing by over 50% year-over-year, as highlighted in a recent report by Bank of America Global Research. Analysts believe that South Korea’s significant investment in AI research and development, along with a rising number of AI-related patents, is likely to enhance its role in adopting AI technologies in the future.
Despite this optimistic outlook, analysts warn that geopolitical issues could negatively impact the semiconductor supply chain in the region, particularly the escalating tensions between the U.S. and China. Although South Korea has diversified its semiconductor exports away from China, the report indicates that over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being nearly the same.
If the geopolitical situation worsens and the U.S. enforces stricter trade restrictions on advanced or AI-related chip exports to China, it could seriously damage South Korea’s memory semiconductor exports, according to Bank of America analysts.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for semiconductor production. Disruptions in the supply chain due to rising tensions could hinder their ability to acquire essential tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limit its exports to China of equipment and technology used in the production of memory chips and advanced logic chips, particularly those with specifications exceeding 14-nanometer and 18-nanometer technologies. South Korean officials are considering this request, mindful of the potential impacts on major companies such as Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Simultaneously, the Biden administration is considering employing an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule restricts the export of any goods from any nation if those goods are produced using a certain percentage of U.S. intellectual property.