South Korea stands out as one of the few economies worldwide experiencing a productivity increase driven by artificial intelligence, though U.S.-China tensions over semiconductor technology may pose challenges to its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has reportedly been the biggest beneficiary of the AI surge, with exports rising by over 50% year-on-year, as detailed in a recent Bank of America Global Research report. Analysts believe that South Korea’s substantial investments in AI research and development, along with its increasing number of AI-related patents, will bolster its standing in AI adoption over the long term.
However, the report highlights that escalating geopolitical tensions could impact the semiconductor supply chain, particularly the ongoing friction between the U.S. and China, which could create obstacles for AI advancements in South Korea. Despite South Korea’s efforts to redirect its chip exports away from China towards other regions, over 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being approximately equal.
The analysts warned that if geopolitical conflicts intensify and the U.S. imposes further trade restrictions on advanced or AI-related semiconductor exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment, meaning that any disruptions in supply chains could hinder their capacity to produce chips.
Reports suggest that the U.S. has urged South Korea to limit its exports of chipmaking technology and equipment to China, targeting advanced logic chips with specifications beyond 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean authorities are reportedly considering the U.S. request, taking into account the potential ramifications for major South Korean corporations like Samsung and SK Hynix, both of which have significant operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any country if they contain a certain percentage of U.S. intellectual property.