South Korea is among the few economies worldwide experiencing a productivity increase due to artificial intelligence, although rising U.S.-China tensions regarding semiconductor chips may pose challenges to its growth, according to analysts from Bank of America.
The semiconductor sector makes up 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with a reported 50% increase in exports year-over-year. Bank of America Global Research highlights that South Korea’s substantial investment in AI research and development, coupled with an increasing number of AI-related patents, is likely to enhance its position in AI adoption over the long term.
However, analysts caution that escalating geopolitical tensions could impact the semiconductor supply chain. The ongoing conflict between the U.S. and China could specifically hinder AI growth in South Korea. While the country has made efforts to diversify its chip exports beyond China, data indicates that in 2023, over 30% of its chip exports still went to China and Hong Kong, with a similar proportion directed toward the U.S.
In the event of escalating geopolitical tensions and potential additional trade restrictions by the U.S. on advanced or AI-related chip exports to China, analysts suggest that South Korea’s memory semiconductor exports could be significantly affected.
South Korean chip manufacturers also rely on China for various components and equipment necessary for chip production. Thus, any disruption in the supply chain stemming from heightened tensions would complicate the ability of South Korean companies to procure the tools required for chip manufacturing.
Furthermore, reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, specifically those more advanced than 14-nanometer processes and DRAM memory chips beyond the 18-nanometer threshold. South Korean officials are reportedly considering this request, given the potential impact on major firms like Samsung and SK Hynix that conduct business in China, its largest trading partner.
In addition, the Biden administration is examining the potential application of the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would restrict the export of any goods to any country if they are produced using a specified percentage of U.S. intellectual property.