South Korea is uniquely experiencing a productivity boost from artificial intelligence, though rising U.S.-China tensions regarding semiconductor chips may threaten its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of the country’s exports, and South Korea has emerged as a major beneficiary of the AI boom, with exports soaring by over 50% year-over-year, as highlighted in a report from Bank of America Global Research. Analysts predict that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption over the long term.
However, the report also noted that geopolitical tensions, particularly between the U.S. and China, could negatively impact the semiconductor supply chain, challenging South Korea’s AI growth. Despite efforts to diversify chip exports from China to other regions, over 30% of South Korea’s chip exports in 2023 were still directed to China and Hong Kong, with a similar percentage sent to the U.S.
Bank of America analysts warned that should U.S.-China tensions escalate further and the U.S. enacts additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact Korean memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment critical in chip production. Any disruptions to this supply chain could complicate the ability of South Korean firms to obtain the necessary tools for semiconductor manufacturing.
Reportedly, the U.S. has asked South Korea to limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those with technology beyond 14-nanometers and DRAM memory chips above 18-nanometers. South Korean officials are considering this request due to potential negative effects on major firms like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
Meanwhile, the Biden administration is contemplating implementing an export control referred to as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods to any nation if they are produced with a certain percentage of U.S. intellectual property.