South Korea stands out as one of the few economies globally experiencing a productivity increase due to artificial intelligence, according to analysts from Bank of America, although rising U.S.-China tensions concerning semiconductor chips could pose risks to this growth.
The semiconductor sector is a crucial component of South Korea’s economy, constituting 17% of its exports. A recent report by Bank of America Global Research highlights that South Korea has emerged as the leading beneficiary of the AI boom, with exports soaring over 50% year-on-year. Analysts suggest that the country’s significant investment in AI research and development, along with an increasing number of AI-related patents, will enhance its AI adoption capabilities in the long run.
However, analysts are wary that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly due to escalating U.S.-China relations, which could challenge South Korea’s AI growth. Despite South Korea’s efforts to diversify chip exports away from China, over 30% of its chip exports in 2023 were directed to China and Hong Kong, with a similar proportion going to the United States.
Bank of America analysts indicated that if U.S.-China tensions intensify and the U.S. imposes further trade restrictions on advanced or AI-related chip 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. Should geopolitical tensions disrupt supply chains, it would complicate South Korean companies’ access to the essential tools for chip production.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology for producing memory chips and advanced logic chips, specifically those beyond 14-nanometer in logic and 18-nanometer in DRAM. South Korean officials are contemplating the U.S. request, mindful of the implications for major South Korean firms like Samsung and SK Hynix, which have substantial operations in China, their largest trading partner.
Furthermore, the Biden administration is reportedly considering applying an export control mechanism called the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This rule would prevent the export of any product to any country if it incorporates a specified percentage of U.S. intellectual property components.