South Korea stands out as one of the few economies experiencing productivity gains from artificial intelligence (AI), although tensions between the U.S. and China regarding semiconductor trade may hinder its growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has greatly benefited from the AI boom, with exports witnessing more than a 50% increase year-over-year, as reported by Bank of America Global Research. Analysts anticipate that South Korea’s significant investment in AI research and development, along with a rising number of AI-related patents, will strengthen its role in AI adoption over the long term.
However, analysts caution that potential geopolitical issues could impact the semiconductor supply chain, particularly due to escalating U.S.-China tensions. While South Korea has begun diversifying its semiconductor exports to other regions, China and Hong Kong still represented over 30% of its chip exports in 2023, with exports to the U.S. being roughly equal.
If U.S. tensions rise further and new trade restrictions on advanced or AI-related chip exports to China are implemented, it could severely affect South Korea’s memory semiconductor exports, the analysts warned.
Additionally, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions would make it difficult for South Korean companies to acquire the essential tools needed for manufacturing chips.
Reports suggest that the U.S. has requested South Korea limit exports to China of equipment and technology for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean authorities are evaluating this request, considering potential impacts on major local companies like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In a related development, the Biden administration is reportedly contemplating applying an export control known as the foreign direct product rule to allies that continue to supply chipmaking tools and equipment to China. This regulation would prevent the export of any goods made with a specified percentage of U.S. intellectual property to any country.