South Korea is experiencing a notable productivity increase attributed to artificial intelligence (AI), although analysts at Bank of America warn that rising tensions between the U.S. and China regarding the semiconductor industry could hinder its growth. The semiconductor sector constitutes 17% of South Korea’s exports, and according to a Bank of America Global Research report, the nation has emerged as the primary beneficiary of the AI boom, with exports surging over 50% year-over-year. Analysts believe that continued high investment in AI research and a growing portfolio of AI-related patents will enhance South Korea’s position in AI adoption.
Despite this positive outlook, analysts caution that potential geopolitical conflicts could impact the semiconductor supply chain. The intensifying rivalry between the U.S. and China poses a particular risk to South Korea’s AI growth. Although South Korea has begun diversifying its chip exports away from China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar portion exported to the U.S.
Bank of America experts warn that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could significantly harm South Korea’s memory semiconductor export market. South Korean chip manufacturers also rely on China for certain components and equipment essential for chip production. Disruptions in the supply chain due to rising tensions could make it difficult for South Korean companies to acquire the necessary tools for manufacturing chips.
Additionally, the U.S. has reportedly requested that South Korea limit exports to China of equipment and technology essential for producing memory and advanced logic chips, specifically those exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request amid concerns over its impact on major domestic companies, including Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In a broader context, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule, targeting allies that continue selling chipmaking equipment to China. This rule would prohibit the export of any goods to any country if they are manufactured using a specified percentage of U.S. intellectual property.