South Korea is experiencing a surge in productivity driven by artificial intelligence, making it one of the rare economies benefiting from this technology, according to analysts at Bank of America. However, escalating tensions between the U.S. and China regarding semiconductor supplies may pose a threat to South Korea’s growth.
The semiconductor sector constitutes 17% of South Korea’s total exports, with the nation reportedly being the leading beneficiary of the AI surge, boasting over 50% year-over-year growth in exports. Analysts predict that South Korea’s substantial investments in AI research and development, alongside an increase in AI-related patents, will enhance its standing in AI implementation in the long run.
Nonetheless, the analysts caution that rising geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain and challenge AI development in South Korea. Despite diversifying chip exports away from China, over 30% of South Korea’s chip exports were directed to China and Hong Kong in 2023, with exports to the U.S. being comparable.
According to Bank of America analysts, if geopolitical tensions escalate and the U.S. enacts further trade restrictions on advanced or AI chips sent to China, it could severely impact South Korea’s memory semiconductor exports. South Korean chip manufacturers also rely on China for essential chipmaking components and equipment. Any disruption in this supply chain could hinder their ability to produce chips.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology for manufacturing memory chips and advanced logic chips, specifically those with technology more advanced than 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are contemplating this request due to potential impacts on major firms such as Samsung and SK Hynix, which operate within China, its largest trading partner.
Additionally, the Biden administration is considering implementing an export control mechanism known as the foreign direct product rule on allies that continue supplying chipmaking tools and machinery to China. This rule would prohibit the export of any goods to any country if they are produced with a significant portion of U.S. intellectual property components.