South Korea is experiencing a unique productivity increase linked to artificial intelligence, according to analysts at Bank of America, although growing tensions between the U.S. and China over chip technology could hinder this progress.
The semiconductor sector plays a crucial role in the South Korean economy, making up 17% of the nation’s exports. A recent report from Bank of America Global Research indicates that South Korea has emerged as a chief beneficiary of the AI surge, with exports surging by over 50% year-over-year. Analysts anticipate that the country’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its adoption of AI technologies in the future.
However, the report cautions that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly due to the escalating conflict between the U.S. and China. Although South Korea has started to shift its chip exports from China to other regions, more than 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being roughly equivalent.
Bank of America’s analysts warn that if U.S.-China tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could significantly impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Any disruption in the supply chain due to geopolitical tensions could complicate the ability of South Korean companies to obtain the necessary tools for chip production.
Adding to the situation, the U.S. has reportedly urged South Korea to limit exports to China of equipment and technology critical for manufacturing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are contemplating this request due to the potential repercussions for major firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Additionally, the Biden administration is reportedly considering implementing an export control known as the foreign direct product rule, targeting allies that continue to sell chipmaking tools and equipment to China. This rule would prevent the export of any goods to any country if they include a specific percentage of U.S. intellectual property components in their manufacturing.