South Korea is emerging as one of the few economies experiencing a productivity increase driven by artificial intelligence, although rising U.S.-China tensions over semiconductor trade may hinder its growth, according to analysts from Bank of America.
The semiconductor sector makes up 17% of South Korea’s exports, and the country is reported to be the largest benefactor of the AI surge, with exports rising over 50% year-on-year, as noted in a Global Research report by Bank of America. Analysts believe that South Korea’s significant investment in AI research and development, along with a growing number of AI-related patents, will bolster its position in AI utilization.
However, they caution that potential geopolitical conflicts could impact the semiconductor supply chain, particularly due to escalating tensions between the U.S. and China. While South Korea has made efforts to diversify its chip exports beyond China to other regions, China and Hong Kong still represented over 30% of the nation’s chip exports in 2023, with exports to the U.S. nearly matching that figure.
Bank of America analysts warned that if geopolitical relations deteriorate and 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 chip manufacturers rely on China for essential chipmaking components and equipment. Disruptions in the supply chain due to geopolitical tensions could complicate the access of South Korean companies to the necessary tools for chip production.
Reports indicate that the United States has requested South Korea to restrict the export of equipment and technology used for manufacturing memory chips and advanced logic chips to China, specifically targeting chips that are more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean authorities are reportedly deliberating on the U.S. request due to the potential consequences for major domestic firms like Samsung and SK Hynix, which have operations in China, their largest trading partner.
In parallel, the Biden administration is reportedly contemplating the use of export controls known as the foreign direct product rule, which would affect allies that continue to sell chipmaking tools and equipment to China. This regulation would prevent the export of any products manufactured with a significant proportion of U.S. intellectual property components to any country.