South Korea is experiencing a notable increase in productivity attributed to artificial intelligence, according to analysts from Bank of America. However, the ongoing tensions between the U.S. and China concerning semiconductor technology may pose challenges to the country’s growth prospects.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country is deemed the biggest beneficiary of the current AI surge, with exports rising over 50% year-over-year, as highlighted in a report by Bank of America Global Research. Analysts predict that South Korea’s substantial investments in AI research and development and its growing number of AI-related patents will enhance its role in AI adoption in the long run.
Nevertheless, the analysts warn that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly with the escalating U.S.-China tensions, which could hinder AI growth in South Korea. Despite efforts to diversify chip exports beyond China, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with similar proportions heading to the U.S.
Bank of America analysts noted that if geopolitical tensions escalate and the U.S. implements additional trade restrictions on the export of advanced or AI-related chips to China, the impact on South Korea’s memory semiconductor exports could be significant.
Furthermore, South Korean chip manufacturers rely on China for certain chip-making components and equipment. Disruptions in this supply chain due to geopolitical tensions would complicate the ability of South Korean firms to acquire the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to impose limitations on exports to China of technologies and equipment required for producing memory and advanced logic chips, particularly those with capabilities beyond 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean authorities are reportedly deliberating this request due to potential repercussions for major South Korean companies such as Samsung and SK Hynix, which have substantial operations in China, their largest trading partner.
In a related development, the Biden administration is said to be contemplating the use of an export control mechanism known as the foreign direct product rule against allies that persist in providing chip-making tools and equipment to China. This rule would prevent the export of any good manufactured with a certain percentage of U.S. intellectual property components to any country.