South Korea stands out as one of the few economies worldwide experiencing a productivity increase due to artificial intelligence (AI), although escalating tensions between the U.S. and China over semiconductor technology may hinder its potential growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation “has been the largest beneficiary of the AI boom, with exports increasing by over 50%” year-on-year, based on a report from Bank of America Global Research. Analysts believe that South Korea’s significant investment in AI research and development, alongside an increasing number of AI-related patents, will likely strengthen its position in AI adoption over the long term.
However, the report indicates that ongoing geopolitical tensions could impact the semiconductor supply chain, particularly the rising conflict between the U.S. and China, which presents challenges to South Korea’s AI growth. While South Korea has worked to diversify its chip exports away from China to other regions, reports show that China and Hong Kong accounted for over 30% of its chip exports in 2023, with exports to the U.S. being comparable.
Analysts warned that if geopolitical tensions intensify and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for several components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions would complicate access to essential tools for South Korean firms.
Reports indicate that the U.S. has requested South Korea to impose restrictions on exporting equipment and technology necessary for manufacturing memory chips and advanced logic chips—specifically chips exceeding 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are reportedly considering this request, weighing the potential impact on major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In parallel, the Biden administration is reportedly contemplating the use of an export control measure, known as the foreign direct product rule, on allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of any goods produced with a specific percentage of U.S. intellectual property components to any country.