South Korea is experiencing one of the few productivity increases tied to artificial intelligence (AI) globally, although tensions between the U.S. and China concerning semiconductor chips could disrupt its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has capitalized significantly on the AI surge, with exports rising more than 50% year-over-year, as noted in a report from Bank of America Global Research. Analysts believe that the country’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will continue to bolster its AI advancements.
Despite these advancements, analysts warned that ongoing geopolitical tensions, particularly between the U.S. and China, might negatively impact the semiconductor supply chain, posing a risk to South Korea’s AI growth. While South Korea has attempted to diversify its chip exports away from China to other regions, over 30% of its chip exports were still to China and Hong Kong in 2023, with a similar amount exported to the U.S.
Should U.S.-China tensions worsen and lead to more trade restrictions on the export of advanced or AI-related chips to China, it could severely affect South Korea’s memory semiconductor exports, as stated by Bank of America analysts.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to geopolitical issues would hinder these manufacturers’ ability to obtain essential production tools.
The U.S. is reportedly urging South Korea to limit its exports to China of equipment and technology for memory chips and advanced logic chips, particularly those that are more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request due to potential impacts on major companies like Samsung and SK Hynix, both of which have operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is evaluating an export control measure known as the foreign direct product rule aimed at allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any nation if they are manufactured with a specific percentage of U.S. intellectual property components.