South Korea is standing out as one of the few economies globally experiencing a productivity increase due to artificial intelligence, although rising tensions between the U.S. and China concerning semiconductors could impede its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a leading beneficiary of the AI boom, with exports rising over 50% year-over-year, as detailed in a report from Bank of America’s Global Research. Analysts believe that South Korea’s significant investment in AI research and development, coupled with a growing number of AI-related patents, will enhance its position in AI adoption in the long run.
However, the analysts cautioned that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly the escalating strife between the U.S. and China, which could pose a challenge to AI growth in South Korea. Despite efforts to diversify semiconductor exports beyond China to other regions, the report indicates that China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. being similar.
The analysts noted, “If geopolitical tensions escalate and the U.S. enacts additional trade restrictions on advanced or AI-related chip exports to China, it could significantly weaken Korea’s memory semiconductor exports.”
South Korean chip manufacturers also rely on China for some components and equipment necessary for chip production. A disruption in supply chains due to heightened tensions would complicate these firms’ ability to obtain the required tools for chip manufacturing.
Reports suggest that the U.S. has requested South Korea to impose restrictions on the export of technology and equipment to China that are used in producing memory chips and advanced logic chips, particularly those logic chips more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request from the U.S., weighing its implications for major firms like Samsung and SK Hynix, which operate in China, their largest trading partner.
Additionally, the Biden administration is said to be contemplating the implementation of export controls, specifically the foreign direct product rule, targeting allies that continue to sell chipmaking tools and equipment to China. This regulation would prohibit the export of any goods to any country if they include a specific percentage of U.S. intellectual property components.