South Korea stands out as one of the few economies globally experiencing a productivity increase attributed to artificial intelligence, according to analysts from Bank of America. However, escalating tensions between the U.S. and China concerning semiconductors may pose a significant challenge to South Korea’s growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as a major beneficiary of the AI surge, with exports witnessing a year-on-year increase of over 50%. Bank of America Global Research highlights that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, are likely to enhance its position in AI adoption in the long run.
Despite this positive outlook, the report notes that geopolitical tensions may impact the semiconductor supply chain, particularly the ongoing friction between the U.S. and China. Although South Korea has diversified its chip export markets beyond China, over 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. at a similar rate.
Analysts caution that should geopolitical tensions escalate, particularly if the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could severely affect Korea’s memory semiconductor exports.
Additionally, South Korean manufacturers rely on China for various chipmaking components and equipment. Disruptions in this supply chain could hinder their ability to procure necessary tools for chip production.
The U.S. has reportedly urged South Korea to limit exports to China of technology and equipment used in producing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are contemplating this request due to potential impacts on significant domestic companies such as Samsung and SK Hynix, which have operations in China, its primary trading partner.
In parallel, the Biden administration is contemplating implementing an export control mechanism known as the foreign direct product rule against allies that continue supplying chipmaking tools and equipment to China. This rule prohibits exporting any goods manufactured with a certain percentage of U.S. intellectual property components to any nation.