South Korea is experiencing a unique productivity boost from artificial intelligence, as highlighted by analysts from Bank of America. However, they caution that escalating U.S.-China tensions over semiconductor technology could pose significant challenges to the country’s economic growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a key player in the AI boom, experiencing over a 50% increase in exports year-over-year, according to a Bank of America Global Research report. Analysts believe that South Korea’s substantial investments in AI research and development, alongside a rising number of AI-related patents, will further enhance its capabilities in AI adoption in the long run.
Despite these positive trends, analysts warn that geopolitical tensions could impact the semiconductor supply chain. The ongoing conflicts between the U.S. and China may hinder AI development in South Korea. Although South Korea has been diversifying its chip exports beyond China, over 30% of its chip exports were to China and Hong Kong in 2023, with similar proportions going to the U.S.
Bank of America analysts noted that if U.S.-China tensions increase and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could seriously affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip producers rely on China for certain components and equipment necessary for chip manufacturing. Disruptions in supply chains due to geopolitical tensions could complicate the ability of South Korean companies to acquire essential tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology used in the production of memory chips and advanced logic chips to China. South Korean officials are reportedly considering the request, weighing its potential impact on major companies like Samsung and SK Hynix, which maintain operations in China, South Korea’s largest trading partner.
In related developments, the Biden administration is contemplating the implementation of an export control, known as the foreign direct product rule, on allied countries that continue to sell chipmaking equipment to China. This rule would prevent the export of goods manufactured with a certain percentage of U.S. intellectual property to any country.