South Korea stands out as one of the few economies globally experiencing a productivity boost from artificial intelligence, although increasing U.S.-China tensions over semiconductor chips could pose challenges to its growth, according to analysts at Bank of America.
The semiconductor sector is a vital component of South Korea’s economy, accounting for 17% of its exports. A recent report from Bank of America Global Research highlighted that the nation has emerged as a major beneficiary of the AI boom, with exports rising by over 50% year-over-year. The analysts predict that South Korea’s substantial investment in AI research and development, along with a growing number of AI-related patents, will enhance its position in adopting these technologies.
Nonetheless, the report warns that potential geopolitical tensions, particularly between the U.S. and China, could disrupt the semiconductor supply chain and present challenges to South Korea’s AI growth. While South Korea has worked to diversify its chip exports beyond China, the report noted that over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being roughly equal.
The analysts cautioned that if U.S.-China tensions escalate, particularly if the U.S. imposes further trade restrictions on the export of advanced or AI-related chips to China, it could significantly impact South Korea’s memory semiconductor exports.
Moreover, South Korean semiconductor manufacturers rely on China for essential chipmaking components and equipment. Any disruption in this supply chain due to heightened tensions would complicate the ability of South Korean companies to acquire the necessary tools for chip production.
Reports indicate that the U.S. has urged South Korea to limit exports to China of equipment and technology used in producing memory chips and advanced logic chips, particularly those with more than 14-nanometer processes and DRAM memory chips exceeding 18-nanometer processes. South Korean authorities are reportedly deliberating over the U.S. request, considering its implications for major South Korean corporations like Samsung and SK Hynix, both of which have significant operations in China, the country’s largest trading partner.
In a related matter, the Biden administration is reportedly contemplating the deployment of an export control measure, known as the foreign direct product rule, aimed at allies that continue supplying chipmaking tools and equipment to China. This regulation would prevent any goods from being exported to any country if they include a certain percentage of U.S. intellectual property components in their manufacturing.