South Korea is among the few economies globally experiencing a productivity increase due to artificial intelligence, although potential challenges to its growth may arise from U.S.-China tensions over semiconductor technology, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as the biggest beneficiary of the AI surge, with exports rising more than 50% year-over-year, based on a report from Bank of America Global Research. Analysts predict that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will enhance its role in AI adoption in the long run.
However, analysts also caution that geopolitical strains could negatively impact the semiconductor supply chain, particularly the escalating conflicts between the U.S. and China, which may hinder AI growth in South Korea. Although South Korea has diversified its chip exports beyond China, over 30% of its chip exports were still directed to China and Hong Kong in 2023, with a similar amount exported to the U.S.
If U.S. geopolitical tensions intensify and additional trade restrictions are placed on advanced or AI-related chip exports to China, it could considerably affect South Korean memory semiconductor exports, analysts warned.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Should tensions disrupt these supply chains, it could complicate the procurement of essential tools for South Korean firms.
Reports indicate that the U.S. has requested South Korea to limit exports to China regarding the equipment and technology essential for producing advanced memory chips and logic chips, particularly those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering the U.S. request, mindful of potential impacts on major companies such as Samsung and SK Hynix, both of which have operations in China, the nation’s largest trading partner.
At the same time, the Biden administration is contemplating utilizing an export control called the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This rule prohibits the export of any item to any country if it contains a certain percentage of U.S. intellectual property components.