South Korea is standing out as one of the few nations experiencing an increase in productivity thanks to artificial intelligence, although rising tensions between the U.S. and China regarding semiconductor technology could hinder its growth, according to analysts at Bank of America.
The semiconductor sector is vital to South Korea’s economy, constituting 17% of its total exports. A Bank of America Global Research report highlights that South Korea has emerged as the top beneficiary of the AI surge, with semiconductor exports rising by over 50% year-on-year. Analysts anticipate that South Korea’s significant investments in AI research and development, along with an increase in AI-related patents, will enhance its position in AI adoption over time.
However, they caution that potential geopolitical challenges could impact the semiconductor supply chain, particularly the escalating tensions between the U.S. and China. Despite diversifying chip exports to other regions, China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. being similar.
Bank of America analysts warned that should geopolitical tensions worsen, and the U.S. imposes further trade restrictions on advanced or AI-related semiconductor exports to China, it could severely affect Korea’s memory chip exports.
Moreover, South Korean semiconductor manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to heightened tensions could complicate access to these critical tools.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, particularly those with more advanced specifications than 14-nanometer for logic chips and 18-nanometer for DRAM memory. South Korean officials are reportedly considering this request, weighing the potential impact on major firms like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the application of the foreign direct product rule on allied nations that continue to supply semiconductor manufacturing tools and equipment to China. This rule would prohibit exporting goods to any country if they are produced using a certain percentage of U.S. intellectual property.