South Korea is experiencing a productivity increase driven by artificial intelligence, making it one of the few economies globally benefiting from this trend, according to analysts from Bank of America. However, the ongoing tensions between the U.S. and China regarding semiconductor technologies may pose challenges to South Korea’s growth.
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 climbing over 50% year-on-year, as stated in a report from Bank of America Global Research. Analysts believe that South Korea’s substantial investment in AI research and development, coupled with a rise in AI-related patents, will enhance its adoption of AI in the long run.
Despite these advantages, analysts caution that geopolitical tensions could impact the semiconductor supply chain, particularly with the strained relations between the U.S. and China. South Korea has taken steps to diversify its chip exports beyond China, yet 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.
The potential escalation of geopolitical tensions may lead to further trade restrictions imposed by the U.S. on exports of advanced or AI-related chips to China, which could significantly impact South Korea’s memory semiconductor exports, according to Bank of America analysts.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment needed for chip production. Disruptions in this supply chain due to rising tensions could hinder South Korean companies’ ability to obtain the necessary tools for manufacturing chips.
Reports indicate that the U.S. has requested South Korea to impose restrictions on its exports to China of equipment and technology utilized in the production of memory chips and advanced logic chips, particularly those beyond 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, mindful of the potential repercussions for major firms like Samsung and SK Hynix, both of which have operations in China, the country’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the use of an export control mechanism known as the foreign direct product rule against allied nations that continue to provide chipmaking tools and equipment to China. This rule would prevent the export of any goods to any country if they are produced using a certain percentage of U.S. intellectual property components.