South Korea is experiencing a unique productivity increase attributed to artificial intelligence, though escalating U.S.-China tensions over semiconductor technology present potential hurdles to its economic growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and a recent Bank of America Global Research report highlights that the nation has been the largest beneficiary of the AI surge, with exports rising by over 50% year-on-year. Analysts predict that South Korea’s substantial investments in AI research and development, along with an increasing number of AI patents, will enhance its ability to adopt AI technologies in the future.
However, the report warns that rising geopolitical tensions could impact the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China. While South Korea has diversified its chip exports to reduce reliance on China, the report notes that China and Hong Kong still accounted for over 30% of its chip exports in 2023, with a similar percentage exported to the United States.
Analysts indicate that if geopolitical tensions worsen and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, this could severely hinder South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers are reliant on China for various chipmaking components and equipment. Disruptions in the supply chain due to rising tensions could make it challenging for these firms to obtain essential tools for chip production.
Reports have emerged that the U.S. has urged South Korea to limit exports of equipment and technology used in the manufacture of memory chips and advanced logic chips, especially those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering the U.S. request, mindful of the implications for major firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is reportedly contemplating the implementation 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 would prohibit the export of any product to any country if it incorporates a specific percentage of U.S. intellectual property components.