South Korea is experiencing a unique productivity increase attributed to artificial intelligence, although heightened U.S.-China tensions regarding semiconductor chips may pose risks to its economic growth, according to analysts from 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 a reported over 50% increase in exports year-over-year, as outlined in a Bank of America Global Research report. Analysts project that South Korea’s substantial investment in AI research and an increasing number of AI-related patents will bolster its standing in AI adoption in the long run.
However, analysts cautioned that potential geopolitical uncertainties could impact the semiconductor supply chain, particularly due to escalating U.S.-China tensions, which could hinder South Korea’s AI development. Despite efforts to diversify chip exports beyond China, over 30% of South Korea’s chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. approximating the same figure.
Bank of America analysts noted, “If geopolitical tensions heighten and the U.S. enforces additional trade limitations on advanced or AI-related chip exports to China, it could severely impair South Korea’s memory semiconductor exports.”
Moreover, South Korean chip manufacturers rely on China for various components and equipment essential for chip production. An escalation in tensions could disrupt the supply chain, complicating access to vital production tools for South Korean companies.
The U.S. has reportedly urged South Korea to limit exports to China of technology and equipment needed for manufacturing memory chips and advanced logic chips that are more advanced than 14-nanometer and DRAM memory exceeding 18-nanometer. South Korean authorities are contemplating the U.S. request, mindful of the potential consequences on major corporations like Samsung and SK Hynix, which operate within China, its largest trading partner.
In parallel, the Biden administration is examining the possibility of implementing an export control known as the foreign direct product rule on allies that continue supplying chipmaking tools and equipment to China. This regulation would prohibit any exports if the goods produced contain a certain percentage of U.S. intellectual property components.