South Korea is experiencing a productivity increase attributed to artificial intelligence, distinct from many other economies, though analysts from Bank of America warn that rising U.S.-China tensions concerning semiconductors could hinder its growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a major player in the AI boom, with export growth surpassing 50% year-over-year, as detailed in a Bank of America Global Research report. Analysts predict that South Korea’s substantial investment in AI research and development, along with a rise in AI-related patents, will bolster its AI adoption in the long run.
However, concerns regarding potential geopolitical conflicts could impact the semiconductor supply chain, particularly with escalating tensions between the U.S. and China affecting South Korea’s AI growth. While South Korea has shifted some of its chip exports from China to alternative markets, over 30% of its chip exports still went to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar share.
Bank of America analysts cautioned that if geopolitical strains intensify and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely weaken South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for essential components and equipment. Disruptions in the supply chain due to tensions could complicate access to these necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology needed for manufacturing advanced logic chips, particularly those more sophisticated than 14-nanometers, as well as DRAM memory chips exceeding 18-nanometers. South Korean officials are considering this request, as it may have significant implications for major corporations like Samsung and SK Hynix, which have operations in China, its largest trading partner.
Meanwhile, the Biden administration is contemplating implementing an export control known as the foreign direct product rule against allies that continue to sell chipmaking equipment to China. This regulation would prevent the export of goods to any country if they contain a specific proportion of U.S. intellectual property.