According to analysts from Bank of America, South Korea is experiencing a distinctive productivity boost from artificial intelligence, contrasting with global trends, but escalating U.S.-China tensions regarding semiconductors may pose significant challenges to this growth.
The semiconductor industry represents 17% of South Korea’s exports, and the country has emerged as a leading beneficiary of the AI expansion, with exports rising over 50% year-over-year, as noted in a recent Bank of America Global Research report. Analysts assess that the country’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will further enhance its position in AI integration over time.
However, analysts caution that potential geopolitical conflicts could impact the semiconductor supply chain, particularly the increasing frictions between the U.S. and China, which could hinder AI advancement in South Korea. Although South Korea has diversified its chip exports beyond China, over 30% of its chip exports in 2023 were directed to China and Hong Kong, with exports to the U.S. being comparable.
Bank of America analysts warned that if geopolitical tensions escalate, especially if the U.S. imposes additional trade restrictions on advanced or AI-related chip exports to China, it could considerably affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for several chipmaking components and equipment. Any disruption in this supply chain due to heightened tensions may complicate the availability of essential tools needed for chip production.
The U.S. has reportedly urged South Korea to limit exports of machinery and technology necessary for producing memory chips and advanced logic chips, specifically targeting those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly considering this request, weighing its implications for major firms like Samsung and SK Hynix that operate within China, South Korea’s largest trading partner.
At the same time, the Biden administration is contemplating implementing an export control known as the foreign direct product rule on allies that persist in supplying chipmaking tools and equipment to China. This rule would prohibit the export of goods to any nation if they contain a specified percentage of U.S. intellectual property components in their production.