South Korea is among the few nations globally experiencing a productivity increase driven by artificial intelligence, although tensions between the U.S. and China regarding semiconductor chips may pose risks to its growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as a key beneficiary of the AI surge, with exports rising over 50% compared to the previous year, as noted in a Bank of America Global Research report. Analysts believe that the ongoing significant investment in AI research and development, coupled with a rise in AI-related patents, will further enhance South Korea’s position in AI adoption over the long term.
However, the report cautioned that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly due to increasing friction between the U.S. and China, which could hinder AI growth in South Korea. Although South Korea has diversified its chip exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar percentage directed to the U.S.
The analysts warned that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on the export of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruptions in this supply chain could hinder the ability of South Korean companies to obtain the necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, particularly those exceeding 14-nanometer for logic chips and beyond 18-nanometer for DRAM memory chips. South Korean officials are considering this request in light of potential consequences for major South Korean companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Moreover, the Biden administration is reportedly contemplating implementing an export control known as the foreign direct product rule on allies that continue supplying chipmaking tools and equipment to China, barring the export of goods produced with a specific percentage of U.S. intellectual property components.