South Korea stands out as one of the few economies globally experiencing a productivity surge thanks to artificial intelligence, though analysts from Bank of America point out that rising tensions between the U.S. and China regarding semiconductor technology may pose risks to this growth.
The semiconductor sector represents 17% of South Korea’s exports, with the nation emerging as a key beneficiary of the AI boom, seeing a year-over-year export increase of over 50%. According to Bank of America Global Research, South Korea’s substantial investment in AI research and development, coupled with an uptick in AI-related patents, is expected to enhance its leadership in AI adoption in the long run.
However, the analysts caution that escalating geopolitical tensions could impact the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China, and this might hinder AI advancements in South Korea. Although South Korea has been diversifying its chip exports away from China to other regions, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar volume heading to the U.S.
The report emphasizes that should tensions escalate and the U.S. implement further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment in chip production. Disruptions in the supply chain due to geopolitical tensions could complicate access to essential manufacturing tools for these firms.
In light of these developments, the U.S. has reportedly requested South Korea to limit exports to China of technologies and equipment essential for making memory and advanced logic chips, particularly those beyond specific manufacturing thresholds. South Korean officials are currently deliberating on this request, considering potential impacts on major domestic companies like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is contemplating the use of an export control known as the foreign direct product rule, which would impact allies that continue supplying chipmaking tools and equipment to China. This rule prevents the export of goods to any country if those goods contain a certain percentage of U.S. intellectual property.