South Korea is one of the few economies globally experiencing a productivity surge attributed to artificial intelligence (AI), although rising U.S.-China tensions regarding semiconductor chips may pose a threat to its growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI boom, with exports rising over 50% year-on-year, as highlighted in a report by Bank of America Global Research. In the long term, analysts anticipate that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will solidify its position in AI adoption.
However, potential geopolitical tensions could impact the semiconductor supply chain, particularly the escalating friction between the U.S. and China, which might challenge the advancement of AI in South Korea. Despite diversifying its chip exports beyond China to other regions, over 30% of South Korea’s chip exports were still directed to China and Hong Kong in 2023, with exports to the U.S. at a similar level.
Analysts warned that if U.S.-China tensions escalate, leading to additional trade restrictions on advanced or AI-related chip exports to China, it could severely disrupt South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruption of this supply chain would make it increasingly challenging for South Korean firms to acquire the tools required for chip manufacturing.
Furthermore, the U.S. has reportedly urged South Korea to limit exports to China of equipment and technology utilized in producing memory chips and advanced logic chips, especially those more advanced than 14-nanometer chips and DRAM memory chips exceeding 18-nanometer technology. South Korean officials are considering this request, mindful of the potential repercussions it could have on major local firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In addition, the Biden administration is reportedly contemplating the application of an export control mechanism known as the foreign direct product rule on allies that continue supplying chipmaking tools and equipment to China. This rule restricts the export of any product to any country if it is manufactured using a specified percentage of U.S. intellectual property components.