South Korea is among the few economies globally that is experiencing a productivity increase due to artificial intelligence, although rising tensions between the U.S. and China regarding semiconductors may pose significant challenges to its economic growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has been identified as a primary beneficiary of the AI boom, boasting an over 50% year-on-year increase in exports. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will bolster its position in AI adoption over the long term.
Nevertheless, the report cautions that potential geopolitical conflicts could impact the semiconductor supply chain. The ongoing tensions between the U.S. and China could hinder AI growth in South Korea. Although the country has sought to diversify its chip exports away from China, over 30% of its chip exports in 2023 were directed to China and Hong Kong, with a similar percentage heading to the U.S.
Bank of America analysts noted that if geopolitical tensions escalate and the U.S. imposes stricter trade restrictions on the export of advanced or AI-related chips to China, it could severely impact the memory semiconductor sector in Korea.
Additionally, South Korean chip producers rely on China for essential chipmaking components and equipment. Disruptions in the supply chain due to rising tensions could pose difficulties for these firms in acquiring the necessary tools to manufacture chips.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used for producing memory and advanced logic chips, specifically targeting those logic chips that exceed 14 nanometers and DRAM memory chips beyond 18 nanometers. South Korean officials are said to be contemplating the U.S. request, considering the potential repercussions for major firms such as Samsung and SK Hynix, both of which have operations in China, its largest trading partner.
In parallel, the Biden administration is reportedly looking into the implementation of export controls known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any item to any country if it is produced with a particular percentage of U.S. intellectual property components.