South Korea is experiencing a unique productivity boost driven by artificial intelligence, according to analysts from Bank of America, although ongoing U.S.-China tensions regarding semiconductors could hinder its growth.
The semiconductor sector is crucial for South Korea, representing 17% of its total exports. Bank of America Global Research has noted that the nation has emerged as a major beneficiary of the AI surge, witnessing a year-over-year increase in exports exceeding 50%. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will further strengthen its AI capabilities.
Nevertheless, potential geopolitical conflicts may impact the semiconductor supply chain, particularly due to escalating U.S.-China relations. Despite South Korea’s efforts to diversify chip exports away from China, over 30% of its semiconductor exports in 2023 were destined for China and Hong Kong, while exports to the U.S. mirrored those figures.
Bank of America analysts cautioned that if geopolitical tensions intensify and the U.S. implements additional trade restrictions on advanced or AI-related semiconductor exports to China, it could severely affect South Korea’s memory chip exports.
Moreover, South Korean semiconductor producers rely on China for certain components and machinery essential for chip manufacturing. Disruptions to this supply chain could pose significant challenges for South Korean companies in sourcing the necessary tools to produce semiconductors.
The U.S. has reportedly requested South Korea to limit exports of equipment and technology used for producing memory chips and advanced logic chips, specifically those surpassing 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating this request amid concerns over potential impacts on major corporations like Samsung and SK Hynix, which have substantial operations in China, South Korea’s largest trading partner.
In a related move, the Biden administration is evaluating the application of an export control mechanism known as the foreign direct product rule, which would affect allies selling chipmaking technology and equipment to China. This rule would prohibit the export of any goods to any country if they are manufactured using a certain percentage of U.S. intellectual property.