South Korea is experiencing a notable productivity increase due to artificial intelligence, making it one of the few economies benefiting markedly from this technology. However, tensions between the U.S. and China regarding semiconductor trade could pose challenges to its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and recent findings indicate that the nation has been the largest beneficiary of the AI surge, with semiconductor exports rising by over 50% year-on-year. Analysts believe that South Korea’s significant investments in AI research and development, alongside a growing number of AI-related patents, will continue to enhance its position in AI usage.
Nevertheless, rising geopolitical tensions, particularly the increasing friction between the U.S. and China, could adversely impact the semiconductor supply chain, which in turn might slow down AI growth in South Korea. Although South Korea has made efforts to diversify its chip exports beyond China, over 30% of its semiconductor exports were still directed to China and Hong Kong in 2023, with the U.S. accounting for a similar share.
Analysts warned that if geopolitical tensions escalate and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, this could severely impact South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for certain components and equipment, meaning that any disruptions in the supply chain could hinder their ability to produce chips.
The U.S. has reportedly asked South Korea to limit exports to China of equipment and technology essential for manufacturing memory chips and advanced logic chips, particularly those with specifications exceeding 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are considering this request due to potential repercussions for major firms such as Samsung and SK Hynix, both of which have operations in China, the nation’s largest trading partner.
Furthermore, the Biden administration is contemplating implementing an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods manufactured with a specified percentage of U.S. intellectual property components to any country.