South Korea is experiencing a significant productivity increase attributed to artificial intelligence, positioning itself as one of the few economies worldwide benefiting from this trend, according to analysts from Bank of America. Nevertheless, rising U.S.-China tensions over semiconductor supplies may pose risks to its growth.
The semiconductor sector represents 17% of South Korea’s total exports, and recent data shows the country has emerged as a leading beneficiary of the AI surge, with exports rising by over 50% year-on-year. Analysts from Bank of America Global Research project that South Korea’s substantial investments in AI research and development will likely enhance its status in AI adoption through an increasing number of AI-related patents.
However, the report cautions that geopolitical conflicts—particularly between the U.S. and China—could hamper the semiconductor supply chain and, consequently, AI growth in South Korea. Despite the country’s efforts to diversify chip exports beyond China, the report notes that China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, which is comparable to export levels directed at the U.S.
Bank of America analysts warn that if U.S.-China tensions escalate and the U.S. implements further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for essential components and equipment in chip production. Disruptions in this supply chain due to rising tensions could hinder the ability of South Korean companies to obtain necessary manufacturing tools.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for fabricating memory and advanced logic chips, specifically those with technology nodes finer than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly evaluating this request, considering the potential impacts on major domestic companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is contemplating the use of an export control mechanism called the foreign direct product rule aimed at allies that continue to export chipmaking tools and technology to China. This rule prohibits the export of any product to any nation if it is manufactured with a specified percentage of U.S. intellectual property.