South Korea is experiencing a notable increase in productivity attributed to artificial intelligence, according to analysts at Bank of America. However, rising tensions between the U.S. and China regarding semiconductor components may pose a risk to the nation’s growth.
The semiconductor sector is critical to South Korea’s economy, making up 17% of its exports, and the country has emerged as a primary beneficiary of the AI surge, boasting over a 50% increase in exports compared to the previous year, as highlighted in a report by Bank of America Global Research. The report notes that South Korea’s substantial investment in AI research and development and a growing number of AI-related patents are likely to enhance its position in AI adoption moving forward.
Despite these advantages, the analysts caution that geopolitical conflicts, particularly between the U.S. and China, could disrupt the semiconductor supply chain, thereby impacting South Korea’s AI growth. While the country has successfully diversified its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with similar figures for shipments to the U.S.
The analysts warned that if geopolitical tensions deepen and the U.S. imposes new trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korean memory semiconductor exports.
Additionally, South Korean chip makers rely on China for key components and equipment used in chip production. Should tensions escalate and the supply chain be affected, it could hamper the ability of South Korean companies to access the necessary tools for chip manufacturing.
Reports indicate that the U.S. has urged South Korea to limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer technology and DRAM memory chips exceeding 18-nanometer technology. South Korean officials are considering the U.S. request, taking into account the potential impact on major Korean firms like Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
In parallel, the Biden administration is reportedly evaluating an export control measure known as the foreign direct product rule, which would affect allied nations that continue to supply semiconductor manufacturing tools and equipment to China. This regulation would prohibit the export of goods produced with a specified percentage of U.S. intellectual property to any country.