South Korea stands out as one of the few economies benefiting from a productivity increase linked to artificial intelligence, according to analysts at Bank of America. However, the ongoing tensions between the U.S. and China regarding semiconductors pose potential challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and it has emerged as a significant beneficiary of the AI boom, with exports soaring over 50% compared to the previous year, as noted in a report by Bank of America Global Research. Analysts express optimism about South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, which they believe will enhance the country’s position in AI utilization moving forward.
Despite these positive indicators, analysts caution that geopolitical tensions could impact the semiconductor supply chain, particularly given the escalating strains between the U.S. and China. Although South Korea has sought to diversify its chip exports away from China, over 30% of its semiconductor exports were directed to China and Hong Kong in 2023, with exports to the U.S. being similar.
If these geopolitical tensions heighten and the U.S. implements further trade restrictions on exports of advanced or AI-related chips to China, it might severely affect South Korea’s memory semiconductor exports, according to Bank of America analysts.
Moreover, South Korean chip manufacturers rely on China for some components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could hinder South Korean companies’ access to essential tools for semiconductor manufacturing.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology critical for the production of memory chips and advanced logic chips, specifically targeting chips more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, taking into account potential repercussions for major South Korean firms like Samsung and SK Hynix that operate in China, the country’s largest trading partner.
Additionally, the Biden administration is said to be contemplating the application of an export control known as the foreign direct product rule. This rule would restrict exports of goods manufactured with a specified percentage of U.S. intellectual property to any country, particularly targeting allies that continue supplying chipmaking tools and equipment to China.