South Korea is emerging as one of the few global economies experiencing a boost in productivity due to artificial intelligence, although analysts from Bank of America caution that U.S.-China tensions regarding semiconductor technology could impede its growth.
The semiconductor sector constitutes 17% of South Korea’s exports, with a Bank of America Global Research report stating that the country has significantly benefited from the AI surge, reporting a more than 50% increase in exports compared to the previous year. The report highlights that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, are expected to enhance its leadership in AI adoption in the future.
However, the analysts warn that geopolitical issues might impact the semiconductor supply chain, particularly amidst escalating tensions between the U.S. and China, which could pose threats to South Korea’s AI development. Although South Korea has begun to diversify its semiconductor exports beyond China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being roughly the same.
The report emphasizes that if geopolitical conflicts intensify and the U.S. imposes further trade restrictions on advanced semiconductor exports to China, it could severely disrupt South Korea’s memory semiconductor exports. Furthermore, South Korean chip producers rely on China for certain components and equipment necessary for chip manufacturing, making supply chain interruptions increasingly problematic for these companies.
The U.S. has reportedly urged South Korea to limit exports of equipment and technology to China, specifically targeting memory chips and advanced logic chips with a technology node finer than 14-nanometers, as well as DRAM memory chips exceeding 18-nanometers. South Korean officials are said to be deliberating over this U.S. request, given the potential consequences for major companies such as Samsung and SK Hynix, both of which have significant operations in China, its largest trading partner.
In tandem, the Biden administration is considering the implementation of an export control measure called the foreign direct product rule, targeting allies that persist in supplying China with chipmaking tools and equipment. This regulation would prevent the export of any product manufactured with a stipulated percentage of U.S. intellectual property components to any country.