South Korea is experiencing a unique productivity advantage from artificial intelligence, as highlighted by analysts from Bank of America. However, the ongoing tensions between the U.S. and China regarding semiconductor technology could pose challenges to this momentum.
The semiconductor sector is critical for South Korea, representing 17% of its exports. According to a Global Research report, the nation has become a prominent beneficiary of the AI surge, with exports increasing by over 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its standing in AI implementation over time.
Despite this progress, analysts caution that geopolitical conflicts could impact the semiconductor supply chain. The intensifying rivalry between the U.S. and China may hinder South Korea’s AI expansion. Although South Korea has managed to diversify its chip exports from China to other regions, China and Hong Kong accounted for more than 30% of its chip exports in 2023, with similar figures reported for exports to the U.S.
The report indicates that if geopolitical tensions escalate and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for some manufacturing components and equipment. Consequently, any disruptions in the supply chain due to rising tensions could hinder Korean companies’ ability to obtain the necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology vital for producing memory chips and advanced logic chips, specifically those surpassing 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean authorities are reportedly considering this request, taking into account potential consequences for major firms such as Samsung and SK Hynix, which operate in China, its largest trading partner.
At the same time, the Biden administration is contemplating applying an export control mechanism known as the foreign direct product rule on allies that persist in supplying chipmaking equipment to China. This rule would prevent the export of any products manufactured with a certain percentage of U.S. intellectual property.