South Korea is emerging as a notable beneficiary of artificial intelligence (AI), with its economy witnessing a productivity boost, according to analysts at Bank of America. However, escalating tensions between the U.S. and China regarding semiconductor technology may pose challenges to this growth.
The semiconductor sector contributes significantly to South Korea’s economy, representing 17% of its exports. A recent report from Bank of America Global Research highlights that South Korea has reaped the rewards of the AI boom, with exports surging by over 50% year-over-year. Analysts anticipate that the country’s substantial investments in AI research and an increase in AI-related patents will enhance its standing in AI adoption over time.
Nonetheless, the report warns that evolving geopolitical tensions, particularly between the U.S. and China, may affect the semiconductor supply chain, presenting potential hurdles for AI growth in South Korea. Although the country has begun diversifying its chip exports beyond China, over 30% of its chip exports were still directed to China and Hong Kong in 2023, with a similar percentage headed to the U.S.
Bank of America analysts cautioned that if geopolitical tensions escalate, particularly with the U.S. introducing further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential components and equipment for chip production. If tensions disrupt this supply chain, acquiring the necessary tools to manufacture chips could become increasingly difficult for South Korean companies.
The U.S. has reportedly requested that South Korea limit exports of technology and equipment for making memory and advanced logic chips to China, specifically targeting chips more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are considering this request, mindful of the potential repercussions for major firms like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
At the same time, the Biden administration is contemplating implementing an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would restrict exports from any country if the goods were produced using a certain percentage of U.S. intellectual property.