South Korea is experiencing a productivity boost from artificial intelligence, making it one of the few economies benefiting significantly from this technology, according to analysts at Bank of America. However, they warn that rising tensions between the U.S. and China over semiconductor trade may pose a challenge to this growth.
The report highlights that the semiconductor sector represents 17% of South Korea’s exports, with a remarkable 50% increase in exports thanks to the AI boom. Analysts predict that South Korea’s substantial investment in AI research and a growing number of AI patents will further enhance its position in AI adoption.
Despite these advantages, the report notes that geopolitical issues could disrupt the semiconductor supply chain, particularly due to U.S.-China tensions. Although South Korea has diversified its chip exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being similar.
Bank of America analysts cautioned that if relations deteriorate and the U.S. imposes further restrictions on the export of advanced chips to China, it could have a detrimental impact on South Korea’s memory semiconductor export sector.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment needed for chip production. Therefore, any disruptions in the supply chain caused by escalating tensions would hinder their ability to obtain necessary production tools.
The U.S. has reportedly requested that South Korea limit its exports to China of equipment and technologies used in manufacturing advanced memory chips and logic chips. South Korean officials are contemplating the implications of complying with the U.S. request, considering the potential fallout for major companies such as Samsung and SK Hynix, who have significant operations in China, their largest trading partner.
In addition, the Biden administration is looking into applying the foreign direct product rule, a type of export control, on allies that continue providing China with chipmaking tools and equipment. This rule would prevent the export of any products made with a specified degree of U.S. intellectual property to any country.