South Korea is experiencing a notable productivity increase attributed to artificial intelligence, although rising U.S.-China tensions over semiconductor technology could pose challenges for its continued growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a key beneficiary of the AI surge, with export figures rising over 50% year-on-year, as highlighted in a report from Bank of America Global Research. Analysts predict that South Korea’s substantial investments in AI research and development, along with an increasing portfolio of AI-related patents, will enhance its position in AI adoption over time.
Nonetheless, the report warns that geopolitical factors may adversely impact the semiconductor supply chain, particularly due to escalating tensions between the U.S. and China. Although South Korea has made efforts to diversify its chip exports away from China, more than 30% of its semiconductor exports were still directed to China and Hong Kong in 2023, which posed a risk to growth in the AI sector. Exports to the U.S. accounted for a similar percentage.
Bank of America analysts cautioned that if U.S.-China tensions escalate further, leading to fresh trade restrictions on the export of advanced and AI-related chips to China, South Korea’s memory semiconductor exports could face significant challenges.
Moreover, South Korean semiconductor manufacturers rely on China for essential components and equipment needed for chip production. Disruptions in the supply chain stemming from geopolitical conflicts could hinder the ability of South Korean companies to acquire the necessary tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limit its exports to China of technology and equipment used in the production of memory chips and advanced logic chips, particularly those utilizing processes more advanced than 14-nanometers and DRAM chips exceeding 18-nanometers. South Korean officials are reportedly considering this request, taking into account the potential impact on major South Korean firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In parallel, the Biden administration is reportedly contemplating implementing an export control measure called the foreign direct product rule, targeting allies that continue to provide chipmaking tools and equipment to China. This rule would prevent the export of any products to any nation if they are produced using a specified percentage of U.S. intellectual property components.