South Korea is experiencing a notable productivity increase due to artificial intelligence, positioning itself as one of the few economies benefiting from the AI boom, according to analysts from Bank of America. However, rising tensions between the U.S. and China regarding semiconductors could pose challenges to this growth.
The semiconductor sector, which constitutes 17% of South Korea’s exports, has reportedly seen over a 50% increase in exports year-over-year, thanks to advancements in AI. Bank of America’s Global Research highlights that South Korea’s significant investments in AI research and development, combined with a rising number of AI-related patents, will likely strengthen its progress in AI adoption over the long term.
Despite these positive indicators, analysts caution that ongoing geopolitical conflicts, particularly between the U.S. and China, could affect the semiconductor supply chain, which is vital for AI growth in South Korea. In 2023, China and Hong Kong accounted for over 30% of South Korea’s chip exports, similar to the percentage directed to the U.S.
The report warns that if geopolitical tensions escalate and the U.S. enacts further trade restrictions targeting advanced or AI-related chip exports to China, South Korea’s memory semiconductor exports could suffer significantly.
Moreover, South Korean chip producers rely on China for key components and equipment. Any disruptions in these supply chains due to heightened tensions could hinder South Korean firms’ ability to manufacture chips effectively.
In light of these circumstances, the U.S. has reportedly urged South Korea to limit exports to China of technology and equipment necessary for producing memory chips and advanced logic chips. South Korean officials are considering this request, weighing its implications for major domestic companies such as Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule, which would restrict allies from supplying chipmaking tools to China if these products incorporate a certain percentage of U.S. intellectual property.