South Korea stands out as one of the few economies experiencing a productivity increase attributed to artificial intelligence, though U.S.-China tensions regarding semiconductor technology pose potential threats to its growth, according to analysts at Bank of America.
The semiconductor sector plays a significant role in South Korea’s economy, comprising 17% of its exports. A recent report from Bank of America Global Research highlights that South Korea has emerged as the largest beneficiary of the AI surge, with exports climbing over 50% year-over-year. Analysts anticipate that South Korea’s considerable investments in AI research and development, along with an increasing number of AI-related patents, will bolster its position in AI adoption in the long run.
Nevertheless, the report warns that geopolitical tensions could impact the semiconductor supply chain, particularly amid escalating U.S.-China relations. Despite South Korea’s efforts to diversify chip exports away from China, over 30% of its chip exports still went to China and Hong Kong in 2023, which is on par with exports to the U.S.
Analysts noted that if geopolitical tensions worsen and the U.S. enforces further trade restrictions on advanced or AI-related semiconductor exports to China, it could severely affect South Korea’s memory semiconductor exports.
South Korean chipmakers also rely on China for certain components and equipment necessary for chip production. Consequently, if tensions disrupt the supply chain, it may hinder the ability of South Korean companies to acquire essential manufacturing tools.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology for manufacturing memory and advanced logic chips, specifically those exceeding 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are reportedly considering this request, aware of possible repercussions for major domestic firms like Samsung and SK Hynix, which have operations in China — South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control measure known as the foreign direct product rule. This regulation would prevent any goods from being exported to any country if they incorporate a certain percentage of U.S. intellectual property components, thereby affecting allies who continue to supply chipmaking tools and equipment to China.