According to analysts from Bank of America, South Korea is among the few global economies benefiting from a productivity increase driven by artificial intelligence, though escalating U.S.-China tensions regarding semiconductor technology could pose challenges to this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as the leading beneficiary of the AI surge, with exports showing an increase of over 50% year-over-year, as highlighted in a report from Bank of America Global Research. Analysts believe that continued high investment in AI research and development, coupled with a rising number of AI-related patents, will enhance South Korea’s standing in AI integration in the longer term.
However, the analysts caution that geopolitical tensions could negatively impact the semiconductor supply chain, particularly those pertaining to the U.S.-China relationship, which could hinder AI advancements in South Korea. Despite the country taking steps to diversify its chip exports beyond China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar amount directed to the U.S.
They warned, “If geopolitical tensions worsen and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could severely impact Korea’s memory semiconductor exports.”
South Korean chip manufacturers are reliant on China for several components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could complicate the ability of South Korean companies to obtain the essential tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports to China of machinery and technologies utilized in the production of memory chips and advanced logic chips, particularly those that exceed 14-nanometer and 18-nanometer specifications, respectively. South Korean officials are reportedly deliberating over the U.S. request, considering the potential impact on major South Korean corporations such as Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Additionally, it has been reported that the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule for allies that continue to sell chip-production tools and equipment to China. This rule prohibits the export of any goods to any country if those goods incorporate a specific percentage of U.S. intellectual property.