South Korea is among the few global economies experiencing a productivity increase thanks to artificial intelligence (AI), although rising tensions between the U.S. and China over semiconductor issues could hinder this growth, according to analysts at Bank of America.
The semiconductor industry constitutes 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports growing by over 50% year-on-year. Analysts believe that South Korea’s substantial investment in AI research and development, coupled with an increasing number of AI-related patents, will enhance its position in AI adoption in the long run.
However, potential geopolitical conflicts could impact the semiconductor supply chain. The escalating tension between the U.S. and China presents a risk to AI growth in South Korea. Although the country has begun diversifying its chip 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 similar.
If U.S.-China tensions intensify and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, analysts believe it could have a detrimental effect on South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for various chipmaking components and machinery. Disruptions in the supply chain due to heightened tensions would make it increasingly challenging for South Korean companies to obtain the tools necessary for chip production.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology associated with the production of memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly contemplating the U.S. request as it could have implications for major South Korean corporations, such as Samsung and SK Hynix, which have operations in China, this being their largest trading partner.
Additionally, the Biden administration is said to be considering implementing an export control known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This regulation would prohibit the export of any product to any country if it incorporates a certain percentage of U.S. intellectual property.