South Korea is one of the few economies experiencing a productivity increase due to artificial intelligence, but potential challenges arise from U.S.-China tensions over semiconductors, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has notably benefited from the AI surge, with exports rising over 50% year-over-year, as outlined in a Bank of America Global Research report. Analysts remain optimistic about South Korea’s significant investment in AI research and development and an increasing number of AI-related patents, which are expected to enhance its status in AI integration.
Nevertheless, the report cautions that geopolitical tensions, particularly the escalating friction between the U.S. and China, may impact the semiconductor supply chain and pose hurdles for AI advancement in South Korea. Despite diversifying chip exports away from China, over 30% of South Korea’s chip exports were still directed to China and Hong Kong in 2023, with similar proportions heading to the U.S.
Analysts warned that if geopolitical issues intensify and the U.S. imposes further trade restrictions on advanced or AI-related semiconductor exports to China, it could critically affect Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could complicate access to these essential tools.
Reports indicate that the U.S. has urged South Korea to limit exports of equipment and technology used in producing memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are evaluating this request, considering its potential impact on major local companies like Samsung and SK Hynix, both of which have operations in China, its largest trading partner.
In parallel, the Biden administration is reportedly contemplating the application of an export control mechanism known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This policy prohibits the export of any goods produced with a specific percentage of U.S. intellectual property components to any country.