South Korea stands out as one of the few global economies experiencing a productivity surge due to artificial intelligence, according to analysts from Bank of America. However, escalating tensions between the U.S. and China regarding semiconductor technology could pose a significant challenge to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a key beneficiary of the AI surge, with exports increasing by over 50% year-over-year, as noted in a report by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will enhance its status in AI adoption in the long run.
Despite this optimistic outlook, analysts warned that geopolitical tensions, particularly between the U.S. and China, could negatively impact the semiconductor supply chain, thereby affecting AI development in South Korea. Although the country has started to diversify its chip exports away from China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar percentage going to the U.S.
Bank of America analysts cautioned that if tensions intensify, and the U.S. imposes further trade restrictions on high-tech or AI-related chip exports to China, it could severely disrupt South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Any disruptions in the supply chain due to geopolitical tensions could hinder South Korean companies’ access to essential tools for chip production.
Reports indicate that the U.S. has urged South Korea to limit exports of equipment and technology vital for manufacturing memory chips and advanced logic chips to China, specifically those that exceed 14-nanometer in logic chip technology and 18-nanometer in DRAM memory chips. South Korean officials are reportedly considering this request, mindful of the potential impact on major local companies such as Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Furthermore, the Biden administration is reportedly contemplating the use of export controls, specifically the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods produced with a certain percentage of U.S. intellectual property to any country.