South Korea is distinguished as one of the few economies worldwide experiencing a productivity increase attributed to artificial intelligence (AI), according to analysts from Bank of America. However, escalating tensions between the U.S. and China regarding semiconductor technology may pose challenges to its economic growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has reaped the benefits of the AI surge, boasting over a 50% increase in exports year-over-year, as reported by Bank of America Global Research. Analysts project that South Korea’s substantial investment in AI research and development, coupled with a rising number of AI-related patents, will enhance its standing in AI utilization in the long run.
Despite these advancements, analysts caution that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly amid growing friction between the U.S. and China, which could hinder South Korea’s AI progress. Although South Korea has expanded its chip exports beyond China to other regions, China and Hong Kong accounted for more than 30% of its chip exports in 2023, with exports to the U.S. approximating similar levels.
Should geopolitical tensions escalate, especially if the U.S. imposes new trade restrictions on advanced or AI-related chip exports to China, Bank of America analysts warn that this could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for specific chipmaking components and equipment; thus, any disruptions in the supply chain due to heightened tensions would complicate the procurement of essential production tools.
The U.S. has reportedly urged South Korea to limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, particularly those exceeding 14-nanometers in technology and DRAM memory chips beyond 18-nanometers. South Korean officials are currently evaluating the U.S. request, considering the potential impact on major domestic companies like Samsung and SK Hynix that operate in China, South Korea’s largest trade partner.
In parallel, the Biden administration is said to be contemplating the application of an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking tools to China. This regulation would prevent the export of any goods made with a certain percentage of U.S. intellectual property to any country.