South Korea stands out as one of the few economies globally experiencing a productivity increase attributed to artificial intelligence, although escalating tensions between the U.S. and China regarding semiconductors may present obstacles to its ongoing growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has reaped significant benefits from the AI surge, with exports rising by over 50% year-on-year, as noted in a report from Bank of America Global Research. Analysts express optimism about South Korea’s considerable investments in AI research and development and an increasing number of AI-related patents, which they believe will further enhance the country’s position in AI integration.
Nevertheless, they caution that “potential geopolitical tensions could impact the semiconductor supply chain,” particularly due to the rising strain between the U.S. and China, which could hinder South Korea’s AI expansion. Despite diversifying its chip exports away from China to other markets in the region, China and Hong Kong still accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. being similar.
Analysts warn that if geopolitical conflicts intensify and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to increasing tensions would complicate the ability of South Korean companies to procure the essential tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limit exports of equipment and technology to China related to the production of memory and advanced logic chips, specifically for chips that exceed 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this U.S. request, mindful of the potential impacts on key South Korean firms like Samsung and SK Hynix, both operating in China, its largest trading partner.
In related developments, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule concerning allies that continue to provide chipmaking tools and equipment to China. This rule prohibits the export of goods to any country if they contain a specific percentage of U.S. intellectual property components.