South Korea is experiencing a notable increase in productivity attributed to artificial intelligence, although analysts from Bank of America warn that rising tensions between the U.S. and China regarding semiconductor technology may pose risks to its economic growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a major beneficiary from the AI expansion, with year-on-year exports increasing by over 50%, as detailed in a report from Bank of America Global Research. The report highlights that South Korea’s considerable investment in AI research and development, along with a surge in AI-related patents, is expected to enhance its position in AI adoption in the long run.
However, analysts expressed concerns that escalating geopolitical tensions may negatively impact the semiconductor supply chain. The ongoing friction between the U.S. and China is particularly worrisome, given that more than 30% of South Korea’s chip exports in 2023 were directed towards China and Hong Kong, with exports to the U.S. being roughly equivalent.
The analysts noted that if U.S.-China conflicts intensify and further trade restrictions are imposed on advanced or AI-related chip exports to China, it could substantially affect South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for essential components and equipment required for chip production. Any disruption in this supply chain could hinder these companies’ ability to produce chips.
The U.S. has reportedly requested that South Korea limit exports of chip manufacturing equipment and technology to China, specifically targeting advanced logic chips with a manufacturing process more refined than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are considering this request, given the potential impact on significant domestic companies such as Samsung and SK Hynix, which conduct operations in China, its largest trading partner.
In parallel, the Biden administration is looking into applying an export control measure known as the foreign direct product rule to allies that continue exporting chipmaking technology to China. This regulation would prevent the export of any products that are manufactured with a specified percentage of U.S. intellectual property.