South Korea is among the few countries experiencing a productivity increase due to artificial intelligence, although rising tensions between the U.S. and China regarding semiconductor technology could pose challenges to its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a key beneficiary of the AI surge, with exports jumping over 50% year-on-year, as highlighted in a report by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will continue to boost its AI adoption in the future.
However, the report cautions that escalating geopolitical tensions could impact the semiconductor supply chain, particularly due to increasing friction between the U.S. and China. Despite South Korea diversifying its chip exports to markets outside of China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being similar in proportion.
If geopolitical tensions worsen, particularly if the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could jeopardize South Korea’s memory semiconductor export market, the analysts warned.
South Korean chip manufacturers also rely on China for various components and equipment critical for chip production. Any disruption in the supply chain prompted by geopolitical conflicts could complicate access for South Korean firms to essential manufacturing tools.
Moreover, the U.S. has reportedly urged South Korea to limit its exports of equipment and technology used to produce memory chips and advanced logic chips to China, specifically those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, weighing its potential impact on major companies such as Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is exploring the possibility of implementing export controls via the foreign direct product rule on allies that persist in supplying chipmaking tools and equipment to China. This regulation would hinder the export of any goods produced with a certain proportion of U.S. intellectual property to any nation.