South Korea is experiencing a significant productivity boost from artificial intelligence, according to analysts at Bank of America. However, rising tensions between the U.S. and China regarding semiconductor technology could pose challenges to this growth.
The semiconductor industry represents 17% of South Korea’s exports, and the nation has emerged as a major beneficiary of the AI surge, with exports increasing by over 50% year-on-year. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with an increasing number of AI-related patents, will enhance its position in AI adoption in the long run.
Despite these positive developments, potential geopolitical tensions may negatively impact the semiconductor supply chain, specifically due to the escalating conflict between the U.S. and China. While South Korea has diversified its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong. Exports to the U.S. were approximately equal.
Analysts indicated that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could significantly harm South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for various components and equipment necessary for chipmaking. Any supply chain disruptions caused by rising tensions could hinder the ability of South Korean companies to obtain essential tools for chip production.
Recently, the U.S. has asked South Korea to limit exports to China of equipment and technology used to create memory chips and advanced logic chips, specifically those that are more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request, mindful of its potential impact on major firms like Samsung and SK Hynix, which have operations in China—its largest trading partner.
In a related development, the Biden administration is reportedly contemplating the use 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 would prohibit the export of any product to any country if it is produced using a specific percentage of U.S. intellectual property.