South Korea is experiencing a notable productivity increase attributed to artificial intelligence, although rising tensions between the U.S. and China over 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 nation has emerged as a leading beneficiary of the AI surge, boasting over a 50% year-over-year increase in exports, as highlighted in a recent report by Bank of America Global Research. Analysts believe that South Korea’s significant investments in AI research and development, alongside a rise in AI-related patents, will enhance its position in AI adoption over the long term.
However, the report warns that geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain, which may hinder the growth of AI in South Korea. Despite diversifying its chip exports beyond China, over 30% of South Korea’s semiconductor exports were directed to China and Hong Kong in 2023, with exports to the U.S. being roughly equal.
Bank of America analysts noted that if the geopolitical situation escalates and the U.S. imposes further trade restrictions on the export of advanced chips to China, it could considerably affect South Korea’s memory semiconductor export market.
Additionally, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Any supply chain disruptions due to rising tensions could complicate access to the essential tools required for manufacturing semiconductors.
The U.S. has allegedly requested that South Korea limit exports to China of equipment and technology utilized in the production of memory chips and advanced logic chips, notably those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly deliberating on the U.S. request, mindful of potential consequences for major firms like Samsung and SK Hynix, both of which have operations in China, South Korea’s largest trading partner.
In a related development, the Biden administration is exploring the implementation of an export control known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any product manufactured with a specified percentage of U.S. intellectual property to any country.