South Korea stands out as one of the few economies experiencing a productivity surge due to artificial intelligence, although rising U.S.-China tensions over semiconductors may hinder its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as the leading beneficiary of the AI surge, with exports soaring over 50% year-over-year, as reported by Bank of America Global Research. Analysts predict that South Korea’s considerable investment in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI utilization in the long run.
Nonetheless, analysts caution that potential geopolitical conflicts could impact the semiconductor supply chain, particularly due to intensifying tensions between the U.S. and China, which could pose challenges for AI advancement in South Korea. Although the country has diversified its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar volume going to the U.S.
According to Bank of America analysts, if U.S.-China tensions escalate and the U.S. enforces additional trade restrictions on advanced or AI-related chip exports to China, it could significantly harm South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for several components and tools needed for chip production. Hence, any disruption in the supply chain due to geopolitical tensions could complicate access to essential equipment for these firms.
Reports indicate that the U.S. has urged South Korea to limit exports to China of technologies and equipment used for producing memory and advanced logic chips, specifically those more advanced than 14-nanometer logic chips and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly deliberating on the U.S. request due to potential impacts on major South Korean corporations, including Samsung and SK Hynix, which have operations in China, their largest trading partner.
In the meantime, the Biden administration is reportedly contemplating the implementation of export controls known as the foreign direct product rule against allies that continue supplying chipmaking equipment to China. This rule would prohibit any goods from being exported if they are produced with a significant portion of U.S. intellectual property components.