South Korea is experiencing a notable increase in productivity due to advancements in artificial intelligence, though escalating U.S.-China tensions regarding semiconductor technology could pose risks to its economic growth, according to analysts from Bank of America.
The semiconductor sector is a vital part of South Korea’s economy, representing 17% of its exports. The country has emerged as a key beneficiary of the AI surge, with semiconductor exports rising by more than 50% year-over-year, as highlighted in a Bank of America Global Research report. Analysts predict that South Korea’s substantial investments in AI research and development, alongside a growing quantity of AI-related patents, will further enhance its standing in AI adoption over time.
However, analysts caution that potential geopolitical conflicts could impact the semiconductor supply chain, particularly due to increasing tension between the U.S. and China, which may pose significant challenges to AI progress in South Korea. Despite efforts to diversify chip exports away from China, over 30% of the nation’s chip exports in 2023 were still directed to China and Hong Kong, with a similar amount going to the U.S.
Bank of America analysts warned that if U.S.-China tensions worsen and the U.S. imposes stricter 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 Chinese suppliers for specific chipmaking components and machinery. Disruptions in this supply chain due to geopolitical tensions could hinder their ability to procure necessary production tools.
Reports indicate that the U.S. has urged South Korea to limit exports of equipment and technology for manufacturing memory chips and advanced logic chips to China. This includes restricting logic chips more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are contemplating the U.S. request, considering potential impacts on major companies such as Samsung and SK Hynix, which operate in China—South Korea’s largest trading partner.
In related developments, the Biden administration is reportedly considering employing an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods manufactured with a specific percentage of U.S. intellectual property.