South Korea is one of the few economies experiencing a productivity increase due to artificial intelligence (AI), although escalating tensions between the U.S. and China regarding semiconductors may pose challenges to this growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, with the country emerging as a primary beneficiary of the AI surge, as exports have risen over 50% year-on-year. The analysts believe that South Korea’s significant investments in AI research and development and its increasing number of AI-related patents will further enhance its role in AI adoption in the long run.
Nevertheless, the analysts warn that geopolitical tensions could impact the semiconductor supply chain, particularly due to rising conflicts between the U.S. and China. While South Korea has diversified 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.
They noted that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain chip-making components and equipment. Disruptions in relations could hinder South Korean companies’ access to the necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit exports of equipment and technology to China used for producing memory chips and advanced logic chips, especially those more advanced than 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are contemplating this request because of potential consequences for major firms like Samsung and SK Hynix, which have operations in China, its largest trading partner.
In the meantime, the Biden administration is said to be considering the application of an export control mechanism known as the foreign direct product rule on allies that continue to provide chip-making tools and equipment to China. This rule prohibits the export of any goods to any country if they are produced with a specific percentage of components that use U.S. intellectual property.