South Korea is one of the few economies globally experiencing a productivity surge due to artificial intelligence, although rising tensions between the U.S. and China over semiconductor technology may pose challenges to this growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as the largest beneficiary of the AI surge, with exports increasing by over 50% year-on-year, as highlighted in a Bank of America Global Research report. Long-term projections suggest that South Korea’s substantial investments in AI research and development, along with a growing portfolio of AI-related patents, will further enhance its position in AI adoption.
However, analysts caution that escalating geopolitical tensions may negatively impact the semiconductor supply chain, particularly due to the conflicts between the U.S. and China. Despite South Korea diversifying its chip exports from China to other regions, China and Hong Kong accounted for over 30% of its chip exports in 2023, with the U.S. making up a similar share.
Bank of America analysts noted that if geopolitical tensions worsen and the U.S. enforces additional trade restrictions on advanced or AI-related chip exports to China, this could severely hinder Korea’s memory chip exports.
Additionally, South Korean chip producers rely on China for specific chipmaking materials and equipment. Disruptions in the supply chain resulting from heightened tensions could complicate the ability of South Korean companies to acquire the necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly deliberating the U.S. request due to potential impacts on major South Korean corporations like Samsung and SK Hynix, which have operations in China, the nation’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating the implementation of an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking equipment to China. This rule would prevent any goods manufactured with a certain percentage of U.S. intellectual property from being exported to any nation.