South Korea is experiencing a noteworthy productivity increase driven by artificial intelligence, according to analysts at Bank of America. However, escalating tensions between the United States and China regarding semiconductor supplies may pose a risk to the country’s growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a major beneficiary of the AI market, with a reported year-on-year increase of over 50% in exports. Analysts indicate that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its position in AI implementation in the long run.
Nevertheless, analysts express concern that increasing geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain and hinder AI advancement in South Korea. Despite diversifying its chip exports away from China to other regions, over 30% of South Korea’s chip exports in 2023 were still directed toward China and Hong Kong. Exports to the U.S. accounted for a similar percentage.
The potential escalation of geopolitical conflicts could prompt the U.S. to impose additional trade restrictions on the export of advanced or AI-related chips to China, which, according to Bank of America analysts, could significantly affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various components and equipment required for chip production. Disruptions in the supply chain due to rising tensions could hinder the ability of South Korean companies to obtain the necessary tools to manufacture chips.
Reports indicate that the U.S. has requested South Korea to limit exports to China of technology and equipment related to memory chips and advanced logic chips, particularly those exceeding 14-nanometer for logic chips and 18-nanometer for DRAM. South Korean officials are deliberating the U.S. request amid concerns regarding the potential impact on major South Korean firms like Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating implementing an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule restricts the export of goods produced using a certain percentage of U.S. intellectual property components to any country.