South Korea stands out as one of the few nations experiencing an increase in productivity from artificial intelligence (AI), according to analysts at Bank of America. However, ongoing tensions between the U.S. and China regarding semiconductor technology may pose challenges to the country’s growth.
The semiconductor sector is a vital part of South Korea’s economy, representing 17% of its exports. A recent report from Bank of America Global Research indicates that South Korea has significantly benefited from the AI surge, with exports rising more than 50% year-over-year. Analysts believe that the nation’s substantial investments in AI research and development, along with a growing number of AI-related patents, will enhance its standing in AI integration over time.
Nevertheless, the report warns that escalating geopolitical tensions could negatively impact the semiconductor supply chain. The U.S.-China rivalry is a particular concern, as more than 30% of South Korea’s chip exports in 2023 went to China and Hong Kong, with similar levels going to the U.S.
Bank of America analysts cautioned that if geopolitical conflicts intensify and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely disrupt South Korea’s memory semiconductor exports.
Moreover, South Korean semiconductor manufacturers rely on China for various chipmaking components and equipment. Any disruption in this supply chain due to rising tensions could hinder South Korean companies’ access to essential production tools.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology necessary for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are contemplating this request, mindful of the potential impact on major corporations like Samsung and SK Hynix, both of which have significant operations in China, its largest trade partner.
In parallel, the Biden administration is considering imposing an export control known as the foreign direct product rule on allied nations that continue to supply chipmaking tools and equipment to China. This rule would prevent exports of any goods to any country manufactured with a specified percentage of U.S. intellectual property components.