South Korea is currently among the few economies globally experiencing a productivity increase due to artificial intelligence, although escalating tensions between the U.S. and China over semiconductor technologies could pose a risk to its growth, as indicated by analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports rising over 50% compared to the previous year, according to a report from Bank of America Global Research. Analysts believe that the country’s substantial investment in AI research and development, coupled with a rising number of AI-related patents, will enhance its standing in the adoption of AI technologies in the long run.
However, the report also warns that potential geopolitical conflicts could impact the semiconductor supply chain, particularly the increasing friction between the United States and China, which could hinder AI development in South Korea. While the nation has diversified its chip exports beyond China to other regions, over 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being comparable.
The analysts noted that if geopolitical tensions heighten and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it might severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chipmakers rely on China for certain components and equipment needed for chip production. If tensions disrupt the supply chain, it could complicate the ability of South Korean companies to acquire the necessary tools for manufacturing chips.
Reports indicate that the U.S. has urged South Korea to limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly deliberating on the U.S. request, considering the potential implications for major domestic companies like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
Additionally, the Biden administration is said to be contemplating the use of an export control measure known as the foreign direct product rule on allies that continue supplying chipmaking tools and equipment to China. This regulation would prevent the export of goods to any country that incorporates a significant percentage of U.S. intellectual property components in their production.