South Korea is emerging as one of the few economies globally experiencing significant productivity gains from artificial intelligence (AI), although increasing tensions between the U.S. and China regarding semiconductor technology could pose risks to this growth, according to analysts from Bank of America.
In a recent report, it was noted that semiconductors constitute 17% of South Korea’s exports, with the nation being the primary beneficiary of the AI surge, witnessing over a 50% increase in exports year-on-year. Bank of America analysts believe that South Korea’s substantial investments in AI research and development, alongside a rising number of AI-related patents, will strengthen its position in AI adoption in the long term.
However, the analysts warned that geopolitical tensions could impact the semiconductor supply chain, particularly due to the escalating conflict between the U.S. and China. Although South Korea has diversified its chip exports beyond China to other regions, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with a similar proportion heading to the U.S.
The report highlighted that if the geopolitical situation intensifies and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, this could severely affect South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for various components and equipment necessary for chip production. Disruptions in the supply chain could hinder these firms’ abilities to acquire the tools needed for manufacturing semiconductors.
Reportedly, the U.S. has requested that South Korea limit exports to China of equipment and technology essential for manufacturing memory chips and advanced logic chips, specifically those that exceed 14-nanometer in technology and DRAM memory chips beyond 18-nanometer. South Korean officials are said to be contemplating this request due to potential consequences for major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Meanwhile, the Biden administration is reportedly considering implementing an export control measure called the foreign direct product rule, which would restrict allies from selling chipmaking tools and equipment to China. This rule would prevent the export of any product if it contains a specific percentage of U.S. intellectual property.