South Korea is experiencing a unique productivity boost from artificial intelligence, according to analysts at Bank of America, although rising tensions between the U.S. and China regarding semiconductor supplies could pose risks to its growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports increasing by over 50% compared to the previous year. Bank of America’s Global Research report indicates that South Korea’s substantial investments in AI research and development, along with a growing portfolio of AI-related patents, are likely to enhance its market position in AI adoption in the long term.
However, the report cautions that geopolitical tensions, particularly between the U.S. and China, may impact the semiconductor supply chain and hinder AI advancement in South Korea. Although the country has been diversifying its chip exports beyond China, data shows that China and Hong Kong accounted for over 30% of these exports in 2023, with exports to the U.S. being roughly comparable.
The analysts warned that if U.S. geopolitical tensions escalate and additional trade restrictions are imposed on advanced or AI-related chip exports to China, it could significantly harm South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various semiconductor components and equipment. Disruption in these supply chains due to heightened tensions would complicate the production capabilities of South Korean companies.
Reports indicate that the U.S. has requested South Korea to limit exports to China of machinery and technology for producing memory and advanced logic chips, particularly for chips more advanced than 14-nanometers and DRAM chips beyond 18-nanometers. South Korean officials are reportedly evaluating this request, mindful of the potential impact on major domestic companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Furthermore, the Biden administration is said to be considering leveraging an export control measure known as the foreign direct product rule against allies that continue supplying chip-making tools to China. This regulation prohibits the export of any goods made with a certain percentage of U.S. intellectual property components to any foreign nation.