Bank of America analysts have highlighted that South Korea is among the few economies experiencing a productivity boost from artificial intelligence (AI). However, they caution that rising tensions between the U.S. and China over semiconductor issues could pose a challenge to this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has reportedly been a major beneficiary of the AI surge, witnessing a year-over-year increase of over 50% in exports. Analysts claim that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will enhance its standing in AI adoption in the long run.
Nevertheless, analysts warn that escalating geopolitical tensions could impact the semiconductor supply chain, particularly due to the growing friction between the U.S. and China. Although South Korea has diversified its chip exports to other regions, China and Hong Kong still accounted for over 30% of its chip exports in 2023, with exports to the U.S. being comparable.
If geopolitical disputes worsen and the U.S. enacts additional trade restrictions on advanced or AI-related chip exports to China, it could significantly affect South Korea’s memory semiconductor exports. Furthermore, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruptions in this supply chain could hinder their ability to procure the necessary tools for chip production.
The United States has reportedly urged South Korea to limit exports to China of equipment and technology for manufacturing memory chips and advanced logic chips, particularly those with specifications more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are contemplating the U.S. request due to potential impacts on major domestic firms such as Samsung and SK Hynix, which have operations in China, its largest trading partner.
Additionally, the Biden administration is considering implementing an export control measure known as the foreign direct product rule against allies that continue to supply China with chipmaking tools and equipment. This rule would prevent the export of any goods to any country if they are manufactured using a specific percentage of U.S. intellectual property components.