South Korea is among the few economies worldwide experiencing a productivity increase due to artificial intelligence, according to analysts at Bank of America. However, they caution that escalating U.S.-China tensions over semiconductor technology may hinder the country’s growth prospects.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI surge, with exports rising by more than 50% year-on-year, as detailed in a Bank of America Global Research report. Analysts predict that South Korea’s substantial investments in AI research and development, alongside an increasing number of AI-related patents, will enhance its position in AI adoption over time.
Nevertheless, analysts warn that potential geopolitical tensions could impact the semiconductor supply chain, particularly given the rising friction between the U.S. and China, which poses a risk to AI growth within South Korea. Despite the nation diversifying its chip exports beyond China to other regions, China and Hong Kong accounted for over 30% of its chip exports in 2023, with exports to the U.S. being roughly equivalent.
If geopolitical tensions intensify and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could heavily affect South Korea’s memory semiconductor exports, according to Bank of America analysts.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Any disruption in the supply chain caused by heightened tensions would make it challenging for these companies to obtain the necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports to China of technology and equipment used in the production of memory chips and advanced logic chips, particularly those more advanced than 14-nanometers for logic chips and over 18-nanometers for DRAM chips. South Korean officials are contemplating the U.S. proposal, mindful of the possible implications for major national firms like Samsung and SK Hynix, which have operations in China, its primary trading partner.
In parallel, the Biden administration is reportedly evaluating the application of an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any product to any nation if it incorporates a specified percentage of U.S. intellectual property.