South Korea is experiencing a unique productivity boost from artificial intelligence, according to analysts from Bank of America, although rising tensions between the U.S. and China regarding semiconductor technology may pose significant challenges to this growth.
The semiconductor sector is vital for South Korea, constituting 17% of its total exports. The Bank of America Global Research report highlights that the country has emerged as a leading beneficiary of the AI boom, boasting over a 50% increase in AI exports compared to the previous year. Going forward, analysts believe that South Korea’s substantial investments in AI research and development, along with a growing number of AI-related patents, will enhance its position in adopting AI technologies.
However, the analysts caution that ongoing geopolitical tensions could have detrimental effects on the semiconductor supply chain. Particularly, the historically increasing friction between the U.S. and China may challenge AI development in South Korea. Although South Korea has diversified its chip exports away from China, it was reported that more than 30% of its chip exports still went to China and Hong Kong in 2023, with similar figures for exports to the United States.
Should tensions escalate further, particularly if the U.S. enacts more stringent trade restrictions on AI-related chip exports to China, it could greatly impact South Korea’s memory semiconductor exports, as noted by Bank of America analysts.
Additionally, South Korean chip producers rely on China for essential components and equipment necessary for chip manufacturing. Disruption in the supply chain due to rising tensions could hinder these manufacturers’ access to the necessary tools for production.
Reports indicate that the U.S. has requested South Korea to impose restrictions on the export of equipment and technology critical to producing advanced semiconductors and memory chips to China. South Korean officials are reportedly considering the request, weighing the possible repercussions on major firms such as Samsung and SK Hynix, which have substantial operations in China, its largest trading partner.
Furthermore, the Biden administration is reportedly contemplating the use of an export control measure known as the foreign direct product rule, aimed at allies who continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any products manufactured with a specific percentage of U.S. intellectual property to other countries.