South Korea stands out as one of the few economies experiencing a productivity increase driven by artificial intelligence, although rising tensions between the U.S. and China regarding semiconductor technology may pose challenges to its economic growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as the largest beneficiary of the recent AI surge, with exports climbing over 50% year over year, as detailed in a report from Bank of America Global Research. Analysts predict that South Korea’s substantial investment in AI research and development, along with a growing portfolio of AI-related patents, will bolster its leadership in AI implementation moving forward.
However, potential geopolitical conflicts, particularly between the U.S. and China, could impact the semiconductor supply chain, which may hinder AI expansion in South Korea. Despite efforts to diversify chip exports beyond China to other regions, data indicates that over 30% of South Korea’s semiconductor exports in 2023 went to China and Hong Kong, with a similar proportion directed to the U.S.
Bank of America analysts cautioned that if geopolitical tensions escalate and the U.S. enforces additional trade restrictions on exports of advanced or AI-related semiconductor products to China, it could have a substantial negative effect on South Korea’s memory chip exports.
Furthermore, South Korean chip manufacturers rely on China for various components and equipment essential for chip production. Any disruption in this supply chain could make it increasingly challenging for South Korean firms to acquire the necessary tools for semiconductor manufacturing.
In light of these concerns, the U.S. has reportedly requested South Korea to limit exports of chip-making equipment and technology to China, particularly for advanced logic chips exceeding 14-nanometer and DRAM memory chips surpassing 18-nanometer. South Korean officials are considering this request, mindful of the potential repercussions on major domestic companies, such as Samsung and SK Hynix, that operate in China, its biggest trading partner.
In parallel, the Biden administration is reportedly contemplating the implementation of an export control measure known as the foreign direct product rule on those allies that continue to supply China with chip manufacturing tools and equipment. This rule would prohibit the export of any goods to any nation if a specified percentage of their components originate from U.S. intellectual property.