South Korea is experiencing a notable productivity increase driven by artificial intelligence, according to analysts from Bank of America. However, they caution that escalating tensions between the U.S. and China over semiconductor chips may pose risks to the country’s economic growth.
Following Nvidia’s recent earnings report, major technology companies are ramping up their investments in AI. The semiconductor sector represents 17% of South Korea’s exports, and the country is reportedly the largest beneficiary of the AI surge, with exports rising more than 50% compared to last year, as highlighted in a Bank of America Global Research analysis. Analysts predict that South Korea’s significant investments in AI research and development, alongside a rise in AI-related patents, will enhance its position in AI adoption in the long run.
Nonetheless, the report indicates that potential geopolitical issues could impact the semiconductor supply chain, particularly in light of increasing U.S.-China tensions, which may hinder AI expansion in South Korea. While South Korea has made efforts to diversify its chip exports away from China, the country, along with Hong Kong, accounted for over 30% of its chip exports in 2023. Exports to the U.S. were approximately at the same level.
Bank of America’s analysts warned that if geopolitical tensions worsen, leading to further U.S. trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for essential components and equipment needed for chip production. Disruptions in the supply chain due to rising tensions could complicate the ability of South Korean companies to obtain the necessary tools for manufacturing chips.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technologies for producing memory and advanced logic chips. South Korean officials are evaluating the U.S. request, considering the potential impact on major firms like Samsung and SK Hynix, both of which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is said to be contemplating implementing an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools to China. This regulation would prevent the export of any product to any nation if it incorporates a certain percentage of U.S. intellectual property.