South Korea is experiencing a notable increase in productivity attributed to artificial intelligence, but rising tensions between the U.S. and China over semiconductor technology present challenges to its economic growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country is reportedly the largest beneficiary of the AI market, with exports rising over 50% year-over-year. The Bank of America Global Research report highlights that South Korea’s significant investment in AI research and development, coupled with a growing portfolio of AI-related patents, is likely to bolster its position in AI adoption in the long run.
Despite these advancements, the report cautions that geopolitical tensions may negatively impact the semiconductor supply chain. The ongoing friction between the U.S. and China could particularly hinder AI growth in South Korea. While South Korea has diversified its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. approximately at the same level.
If geopolitical conflicts escalate and the U.S. enforces additional trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports, the analysts warned.
Moreover, South Korean chip manufacturers are reliant on China for various chipmaking components and equipment. Should tensions disrupt supply chains, it may become increasingly challenging for these firms to obtain necessary tools for chip production.
Reportedly, the U.S. has requested that South Korea limit exports of equipment and technology used in the production of memory chips and advanced logic chips, specifically those exceeding 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are contemplating this request due to potential consequences for major corporations like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Additionally, the Biden administration is considering implementing an export control measure known as the foreign direct product rule, which would affect allies that continue to sell chipmaking tools and equipment to China. This rule prohibits the export of any goods produced with a certain percentage of U.S. intellectual property components to any country.