South Korea is experiencing a significant productivity boost from artificial intelligence, standing out as one of the few economies globally benefiting from this trend. However, analysts at Bank of America warn that escalating tensions between the U.S. and China over semiconductor chips might pose challenges to South Korea’s growth trajectory.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports. The country has emerged as a leading beneficiary of the AI boom, with a remarkable increase of over 50% in exports year-over-year. Analysts anticipate that South Korea’s substantial investments in AI research and development, combined with an increasing number of AI-related patents, will enhance its position in AI deployment in the long run.
Nonetheless, analysts caution that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly the intensifying conflict between the U.S. and China, which could hinder AI growth in South Korea. Despite efforts to diversify chip exports away from China, the report reveals that in 2023, over 30% of South Korea’s chip exports were directed towards China and Hong Kong, with U.S. exports accounting for a similar proportion.
Bank of America analysts stated that should geopolitical tensions escalate further, particularly if the U.S. implements additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various components and equipment essential for chip production. Disruptions in the supply chain due to rising tensions could hinder the ability of South Korean companies to access the necessary tools for chip manufacturing.
Reportedly, the U.S. has urged South Korea to impose restrictions on exports to China regarding equipment and technology used for producing memory and advanced logic chips, specifically those more advanced than 14-nanometer for logic chips and beyond 18-nanometer for DRAM memory chips. South Korean officials are reportedly contemplating this request due to potential implications for major domestic companies such as Samsung and SK Hynix, which have operations in China, the nation’s largest trading partner.
Additionally, the Biden administration is considering employing an export control mechanism known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This regulation would prevent the export of any product to any nation if it is manufactured using a specified percentage of U.S. intellectual property components.