South Korea stands out as one of the few economies globally experiencing a productivity surge due to artificial intelligence, although rising U.S.-China tensions regarding semiconductor technology may hinder its growth, according to analysts from Bank of America.
The semiconductor sector makes up 17% of South Korea’s exports, and the nation has been hailed as the leading beneficiary of the AI-driven market, registering a more than 50% increase in exports year-over-year, as highlighted in a report by Bank of America Global Research. Analysts are optimistic that South Korea’s substantial investments in AI research and development, along with a growing portfolio of AI-related patents, will enhance its standing in AI adoption in the long term.
Nevertheless, the analysts cautioned that geopolitical tensions could impact the semiconductor supply chain, particularly due to escalating conflicts between the U.S. and China, which could pose a risk to AI growth in South Korea. Even though South Korea has shifted some of its chip exports away from China to other regions, over 30% of its chip exports in 2023 were still directed toward China and Hong Kong, according to the report. Exports to the U.S. accounted for a similar share.
The report warned that if geopolitical tensions rise and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, this could severely affect South Korea’s memory chip exports. Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment, making it challenging to source the necessary tools for chip production if tensions disrupt the supply chain.
Reports indicate that the U.S. has urged South Korea to limit exports to China of technology and equipment used for manufacturing memory chips and advanced logic chips, specifically those with capabilities exceeding 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are weighing the request due to potential repercussions for major companies like Samsung and SK Hynix, both of which have operations in China, the country’s largest trading partner.
In parallel, the Biden administration is considering implementing an export control measure known as 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 product to any nation if a specific percentage of its components are derived from U.S. intellectual property.