South Korea is currently experiencing a productivity boost from artificial intelligence, one of the few economies globally to do so, according to analysts from Bank of America. However, tensions between the U.S. and China regarding semiconductor technology could pose challenges to its growth.
The semiconductor sector plays a crucial role in South Korea’s economy, representing 17% of its exports. A Bank of America Global Research report highlights that South Korea has emerged as a major beneficiary of the AI surge, with exports soaring over 50% year-over-year. Analysts believe that the country’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI utilization.
Nonetheless, the report indicates that geopolitical tensions, particularly the rising conflict between the U.S. and China, could impact the semiconductor supply chain and restrict AI growth in South Korea. Despite diversifying chip exports beyond China, the report notes that over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with exports to the U.S. accounting for a similar share.
Bank of America analysts warned that escalating geopolitical tensions and further U.S. trade restrictions on advanced or AI-related chip exports to China could significantly affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for essential components and equipment needed for chip production. Any disruptions in the supply chain due to heightened tensions could hinder these companies’ ability to obtain the necessary tools.
The U.S. has reportedly asked South Korea to limit its exports to China of equipment and technology for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating this request due to potential consequences for major firms like Samsung and SK Hynix, which operate within China, South Korea’s largest trading partner.
In parallel, the Biden administration is said to be considering an export control mechanism known as the foreign direct product rule for allies that continue to sell chipmaking tools and equipment to China. This rule would prevent the export of any product to any nation if it contains a specific portion of U.S. intellectual property.