South Korea is among the few economies globally experiencing a productivity increase from artificial intelligence, according to analysts from Bank of America. However, tensions between the U.S. and China regarding semiconductor supplies may pose a threat to this growth.
The semiconductor sector represents 17% of South Korea’s exports, with recent reports indicating that the country has emerged as a significant beneficiary of the AI boom, seeing exports rise by over 50% year-on-year. Analysts suggest that South Korea’s substantial investments in AI research and development, along with a rise in AI-related patents, will enhance its capabilities in adopting these technologies.
Nonetheless, the report cautions that potential geopolitical tensions could impact the semiconductor supply chain, particularly given the increasing friction between the U.S. and China. Although South Korea has diversified its chip exports to other regions, over 30% of these exports still went to China and Hong Kong in 2023, with exports to the U.S. being similar.
Bank of America analysts noted that if geopolitical tensions escalate and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential components and equipment used in chip production. Thus, any disruptions in this supply chain due to heightened tensions would make it challenging for South Korean companies to obtain the necessary tools for manufacturing chips.
In addition, reports have surfaced indicating that the U.S. has requested South Korea to limit exports to China of equipment and technology crucial for producing memory chips and advanced logic chips, especially those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating the U.S. request, considering the potential impact on major firms like Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
Meanwhile, the Biden administration is reportedly evaluating the use of an export control mechanism known as the foreign direct product rule against allies that continue to provide chipmaking tools to China. This regulation would prevent the export of any product made using a specified percentage of U.S. intellectual property components to any country.