South Korea is emerging as one of the few economies globally experiencing a productivity surge driven by artificial intelligence, though ongoing tensions between the U.S. and China regarding the semiconductor industry may pose challenges for its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has capitalized on the AI boom, with exports reportedly rising over 50% year-over-year. The report from Bank of America Global Research anticipates that South Korea’s significant investments in AI research and development, alongside a rising number of AI-related patents, will strengthen its position in AI adoption in the long run.
However, analysts caution that potential geopolitical tensions could impact the semiconductor supply chain, particularly due to escalating U.S.-China relations, which may hinder AI growth in South Korea. Despite efforts to diversify chip exports away from China, the country and Hong Kong accounted for more than 30% of South Korea’s chip exports in 2023, with similar figures for exports to the U.S.
Should geopolitical tensions intensify, especially if the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could significantly affect South Korea’s memory semiconductor exports. South Korean chip manufacturers also rely on China for certain components and equipment necessary for chip production, meaning disruptions in the supply chain could hinder their operations.
The U.S. has reportedly requested that South Korea limit exports of memory chip-making equipment and technology to China, targeting advanced logic chips and DRAM memory chips beyond specified specifications. South Korean officials are considering this request, mindful of potential effects on major South Korean companies like Samsung and SK Hynix, which have operations in China, its largest trading partner.
Additionally, the Biden administration may explore applying an export control measure known as the foreign direct product rule to allies that persist in selling chipmaking tools and equipment to China. This rule restricts the export of goods to any country if they are produced using a certain percentage of U.S. intellectual property.