South Korea stands out as one of the few economies globally experiencing a productivity surge due to artificial intelligence, although ongoing tensions between the U.S. and China regarding semiconductor chips could pose risks to its growth, as indicated by analysts from Bank of America.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports. The nation has emerged as a significant beneficiary of the AI boom, with exports increasing by over 50% year-over-year. Long-term projections from analysts suggest that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its trajectory in AI adoption.
Nonetheless, the potential for heightened geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain, which may challenge South Korea’s AI growth. While the country has been diversifying its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar amount going to the U.S.
Analysts have warned that if U.S.-China tensions escalate, especially if the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s semiconductor memory exports.
Additionally, South Korean semiconductor manufacturers rely on China for various chipmaking components and equipment. Disruptions in the supply chain due to geopolitical tensions would complicate the access of South Korean firms to the necessary tools for chip production.
The U.S. government has reportedly requested South Korea to limit exports of equipment and technology essential for producing memory chips and advanced logic chips to China. This seeks to restrict exports of logic chips exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer technology. South Korean officials are currently deliberating the U.S. request, considering the potential impact on major South Korean corporations like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Furthermore, the Biden administration is exploring the application of the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any product to any country if it is produced with a certain percentage of U.S.-origin intellectual property.