South Korea is experiencing a unique productivity increase linked to artificial intelligence, although rising tensions between the U.S. and China concerning semiconductor trade may pose challenges for future growth, as indicated by analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a key winner in the AI sector, with exports rising by over 50% year-over-year, according to a report from Bank of America Global Research. Analysts believe that South Korea’s significant investments in AI research and development, along with a growing number of AI-related patents, will strengthen its position in AI adoption over time.
However, the analysts warned that geopolitical issues could negatively impact the semiconductor supply chain, particularly the escalating tensions between the U.S. and China, which might hinder South Korea’s AI growth. Despite efforts to diversify chip exports beyond China, the nation and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. being roughly similar.
The analysts noted that if U.S.-China tensions worsen and the U.S. enacts additional trade restrictions on advanced or AI-related chip exports to China, it could significantly undermine Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. If geopolitical tensions disrupt this supply chain, it could complicate the ability of South Korean firms to procure the necessary tools for chip production.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology used for manufacturing memory and advanced logic chips, particularly those more advanced than 14-nanometer logic chips and 18-nanometer DRAM memory chips. South Korean officials are assessing the implications of this request on major domestic companies like Samsung and SK Hynix, both of which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is contemplating the use of an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any product to any country if it was manufactured using a significant percentage of U.S. intellectual property components.