South Korea is experiencing a notable productivity boost from artificial intelligence, distinguishing itself as one of the few economies globally benefiting from AI advancements. However, analysts at Bank of America caution that escalating U.S.-China tensions over semiconductor issues could hinder the country’s growth prospects.
The semiconductor sector is vital to South Korea’s economy, accounting for 17% of its exports. A recent report from Bank of America Global Research highlights that South Korea has become the largest beneficiary of the AI surge, with a more than 50% increase in AI-related exports year-over-year. Looking ahead, analysts anticipate that South Korea’s significant investment in AI research and development, alongside a rising number of AI-related patents, will further fortify its position in AI adoption.
Nonetheless, the report warns that potential geopolitical conflicts may affect the semiconductor supply chain, particularly the increasingly strained U.S.-China relations, which could pose challenges for South Korea’s AI growth. Although South Korea has made efforts to diversify its chip exports beyond China, more than 30% of its chip exports in 2023 were directed to China and Hong Kong, with similar figures for exports to the U.S.
Bank of America analysts stated that escalating geopolitical tensions, coupled with new U.S. trade restrictions on advanced and AI-related chip exports to China, could substantially impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment critical for chip production. Any disruptions in the supply chain stemming from these tensions could impair South Korean companies’ ability to procure necessary tools for manufacturing chips.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory and advanced logic chips. South Korean officials are reportedly deliberating the implications of this request on major firms such as Samsung and SK Hynix, which have significant operations in China, its primary trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control termed the foreign direct product rule, which would target allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of goods to any nation if they contain a specified percentage of U.S. intellectual property components.