South Korea is experiencing a notable increase in productivity driven by artificial intelligence, although rising tensions between the U.S. and China concerning semiconductor supplies may pose a significant challenge to its economic growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a leading beneficiary of the AI surge, with exports rising over 50% compared to the previous year. Analysts project that Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will bolster its adoption and advancement in the field.
Nevertheless, analysts caution that geopolitical tensions may impact the semiconductor supply chain, particularly given the escalating friction between the U.S. and China. While South Korea has taken steps to diversify its chip exports away from China, the two nations, along with Hong Kong, accounted for more than 30% of its chip exports in 2023, with exports to the U.S. being roughly equivalent.
Should geopolitical tensions intensify and the U.S. implement further trade restrictions on advanced or AI-related chip exports to China, it could significantly hamper South Korea’s memory semiconductor exports, according to the analysts.
Additionally, South Korean semiconductor manufacturers rely on China for essential chipmaking components and equipment. In the event of disrupted supply chains, these firms may face challenges in obtaining the necessary tools for production.
The U.S. government has reportedly urged South Korea to limit its exports to China of equipment and technology used in the production of memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly assessing the request due to potential repercussions for major South Korean businesses, such as Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
In parallel, the Biden administration is allegedly considering the implementation of an export control known as the foreign direct product rule, targeting allies that continue to sell chipmaking tools and equipment to China. This regulation would prohibit exports to any nation of goods manufactured with a certain percentage of U.S. intellectual property.