South Korea is among the few economies globally experiencing a productivity surge driven by artificial intelligence (AI), according to analysts from Bank of America. However, escalating tensions between the U.S. and China over semiconductor supplies could hinder this growth.
The semiconductor sector represents 17% of South Korea’s total exports, making the country a major beneficiary of the AI boom, with exports increasing by over 50% compared to last year, as per a report from Bank of America Global Research. Analysts believe South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will improve its position in AI adoption over time.
Despite this optimistic outlook, analysts cautioned that potential geopolitical tensions may affect the semiconductor supply chain, particularly due to the increasing friction between the U.S. and China. While South Korea has managed to diversify its chip exports away from China to other regions, more than 30% of its semiconductor exports still went to China and Hong Kong in 2023, mirroring the volume exported to the U.S.
The report warns that if geopolitical tensions worsen and the U.S. imposes further trade restrictions on advanced semiconductor exports to China, it could severely impact South Korea’s memory chip exports. Additionally, South Korean manufacturers rely on China for essential chipmaking components and equipment. Disruptions in supply chains could make it challenging for these firms to obtain the necessary tools for production.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology used in the production of memory and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips surpassing 18-nanometer technology. South Korean officials are considering this request, mindful of the potential consequences for major firms such as Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control, known as the foreign direct product rule, on allies who continue supplying chipmaking tools to China. This regulation would prohibit the export of any product manufactured with a specified percentage of U.S. intellectual property components to any country.