South Korea is standing out as one of the few economies globally experiencing a productivity surge driven by artificial intelligence, though increasing tensions between the U.S. and China regarding semiconductors could hinder its growth, according to analysts at Bank of America.
The semiconductor sector plays a critical role in South Korea’s economy, accounting for 17% of its exports. The Bank of America Global Research report highlights that South Korea has been a primary beneficiary of the AI surge, with exports rising by over 50% year-on-year. Analysts believe that the nation’s substantial investment in AI research and development, coupled with a rising number of AI-related patents, will bolster its position in AI implementation moving forward.
However, there are concerns about how geopolitical tensions might affect the semiconductor supply chain, particularly in light of the escalating discord between the U.S. and China. While South Korea has worked to diversify its semiconductor exports away from China, the report states that in 2023, China and Hong Kong still accounted for over 30% of its chip exports, with exports to the U.S. being comparable.
The analysts warned that if geopolitical issues worsen and the U.S. imposes new trade restrictions on advanced or AI-related chip exports to China, it could significantly impact South Korea’s memory semiconductor export performance.
Moreover, South Korean chip manufacturers rely on China for essential chipmaking components and equipment. Disruptions in the supply chain due to escalating tensions could complicate the ability of South Korean companies to obtain the necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are considering the U.S. request due to potential impacts on major domestic firms like Samsung and SK Hynix, which have significant operations in China, the country’s largest trade partner.
Additionally, the Biden administration is thought to be evaluating implementing an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule prevents the export of any goods produced with a certain percentage of U.S. intellectual property components to any country.