South Korea is witnessing a unique productivity increase from artificial intelligence, although rising tensions between the U.S. and China over semiconductors could hinder its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI surge, with exports rising by over 50% year-over-year, as detailed in a report by Bank of America Global Research. Analysts believe that South Korea’s substantial investment in AI research and development, combined with a rising number of AI-related patents, will enhance its standing in AI adoption in the long run.
However, analysts caution that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly regarding the escalating disputes between the U.S. and China, which could pose challenges to AI growth in South Korea. Although the country has shifted its chip exports away from China to other regions, China and Hong Kong still accounted for more than 30% of its chip exports in 2023, with exports to the U.S. being roughly equivalent.
They noted that if geopolitical tensions were to intensify and the U.S. implements further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Consequently, any disruptions in these supply chains due to tensions would complicate the ability of South Korean companies to acquire the necessary tools for chip production.
The U.S. has reportedly requested South Korea to limit exports of equipment and technology essential for producing memory and advanced logic chips, specifically those surpassing 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly evaluating this request, considering the possible impacts on major firms like Samsung and SK Hynix, which operate in China, its largest trading partner.
In the meantime, the Biden administration is reportedly contemplating the implementation of an export control mechanism known as the foreign direct product rule on allied countries that continue supplying chipmaking tools and equipment to China. This rule would prevent any goods from being exported if they contain a certain percentage of U.S. intellectual property components.