South Korea stands out as one of the few economies experiencing a productivity increase due to artificial intelligence, though rising U.S.-China tensions over semiconductor trade may impede its growth, according to analysts from Bank of America.
The semiconductor sector plays a critical role in South Korea’s economy, constituting 17% of its total exports. Bank of America’s Global Research report highlights that South Korea has been the largest beneficiary of the current AI boom, with semiconductor exports rising more than 50% compared to last year. Analysts predict that the country’s substantial investments in AI research and development, coupled with a growing number of AI-related patents, will further bolster its position in AI implementation in the future.
Nonetheless, the report cautions that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly due to the escalating conflict between the U.S. and China. This tension poses potential challenges for South Korea’s AI expansion. Although South Korea has made efforts to diversify its chip exports away from China, more than 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar proportion going to the United States.
Should tensions escalate and the U.S. impose further trade restrictions on the export of advanced or AI-related chips to China, the memory semiconductor market in Korea could face serious setbacks, Bank of America analysts warn.
Moreover, South Korean chip manufacturers rely on China for various chip-making components and equipment. Any disruption in this supply chain could hinder South Korean companies’ ability to acquire the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used in manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometer and 18-nanometer thresholds for logic and DRAM memory chips, respectively. South Korean officials are currently deliberating on this request, acknowledging potential impacts on major firms like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
Additionally, the Biden administration is reportedly considering implementing an export control known as the foreign direct product rule on allies that continue to supply chip-making tools and equipment to China. This rule would prevent the export of any product to any country if it is produced using a specified percentage of U.S. intellectual property components.