South Korea stands out among global economies as one of the few experiencing a productivity increase due to artificial intelligence, according to analysts from Bank of America. However, escalating U.S.-China tensions regarding semiconductors could pose risks to South Korea’s growth.
The semiconductor sector represents 17% of South Korea’s exports, with the nation reaping significant benefits from the AI surge, seeing a year-over-year increase in exports of over 50%. Analysts believe that South Korea’s substantial investments in AI research and development, alongside a rising number of AI-related patents, will bolster its position in AI utilization in the long run.
Despite this optimism, analysts caution that geopolitical issues may impact the semiconductor supply chain, particularly citing U.S.-China tensions as a potential obstacle to AI advancement in South Korea. Although the country has made strides in diversifying its chip exports away from China, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with the same proportion directed towards the U.S.
Bank of America analysts warn that if U.S.-China tensions escalate further and the United States enforces new trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s DRAM memory chip exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruptions in the supply chain due to geopolitical tensions could impede these companies’ access to necessary production tools.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean authorities are deliberating the U.S. request, mindful of the potential impact on major domestic firms, such as Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is reportedly considering the implementation of an export control mechanism known as the foreign direct product rule on allies that continue to supply China with chipmaking tools and equipment. This rule restricts the export of goods manufactured with a specific percentage of U.S. intellectual property.