South Korea is experiencing a notable productivity improvement attributed to artificial intelligence, according to Bank of America analysts. However, the ongoing tensions between the U.S. and China over semiconductor technology could pose challenges to South Korea’s growth in this area.
The semiconductor sector is crucial for South Korea, representing 17% of the country’s exports. A report from Bank of America Global Research highlights that South Korea has emerged as a significant beneficiary of the AI boom, with exports increasing by over 50% year-on-year. Analysts believe that the nation’s substantial investments in AI research and development, along with a growing number of AI-related patents, will solidify its position in AI adoption in the long run.
Nevertheless, the report warns that geopolitical tensions, particularly between the U.S. and China, could impact the supply chain for semiconductors, potentially hindering AI growth in South Korea. While the country has made efforts to diversify 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 similar percentages for exports to the U.S.
The analysts caution that any escalation in geopolitical tensions, particularly if the U.S. imposes further trade restrictions on the export of advanced or AI-related chips to China, could significantly affect Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in this supply chain would complicate the ability of South Korean firms to obtain the required tools for manufacturing chips.
The U.S. has reportedly requested that South Korea limit its exports to China of equipment and technology for manufacturing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are considering this request, mindful of the potential impact on major firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating the implementation of the foreign direct product rule, an export control that would prevent the sale of any product to other countries if it has been manufactured using a specified percentage of U.S. intellectual property.