South Korea is experiencing a productivity boost from artificial intelligence, making it one of the few economies benefiting from this trend, although ongoing U.S.-China tensions regarding semiconductor supplies could pose challenges to its growth, according to analysts at Bank of America.
The semiconductor sector is crucial for South Korea, accounting for 17% of its exports. The country has reportedly been a major recipient of the AI surge, with semiconductor exports increasing by over 50% year-over-year, as highlighted in a report from Bank of America Global Research. Analysts are optimistic about South Korea’s substantial investments in AI research and development and its increasing number of AI-related patents, which they believe will enhance the nation’s position in AI adoption in the long run.
However, the analysts raised concerns that rising geopolitical tensions, particularly between the U.S. and China, could negatively impact the semiconductor supply chain, potentially hindering AI growth in South Korea. Despite efforts to diversify chip exports away from China, over 30% of South Korea’s semiconductor exports in 2023 were directed to China and Hong Kong, with a similar proportion heading to the U.S.
The report warned that escalating geopolitical issues and potential additional U.S. trade restrictions on exports of advanced or AI-related chips to China could significantly impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Disruptions in this supply chain due to rising tensions could impede their ability to acquire essential tools for production.
The U.S. has reportedly requested that South Korea limit the export of specific equipment and technology used in manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometer and 18-nanometer specifications, respectively. South Korean officials are considering this request amid concerns about its implications for major domestic firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Simultaneously, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule restricts the export of any product manufactured using a certain percentage of U.S. intellectual property.