South Korea is experiencing a productivity boost from artificial intelligence, setting it apart from many other global economies, according to analysts at Bank of America. However, rising tensions between the U.S. and China regarding semiconductor chips could pose challenges to this growth.
The semiconductor industry represents 17% of South Korea’s exports, with the nation emerging as a prominent beneficiary of the AI boom, evidenced by a year-over-year increase in AI-related exports of over 50%. Analysts believe that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption over the long term.
Despite these positive trends, the analysts caution that geopolitical issues could impact the semiconductor supply chain, particularly due to escalating tensions between the U.S. and China. Although South Korea has taken steps to diversify its chip exports away from China, over 30% of its chip exports in 2023 were still directed toward China and Hong Kong, with a similar percentage exported to the U.S.
The Bank of America analysts highlighted that if tensions worsen and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could significantly hinder South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruptions in the supply chain could make it challenging for these firms to obtain the necessary tools.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technologies utilized in the production of memory chips and advanced logic chips. South Korean officials are reportedly evaluating this request, considering potential repercussions for major companies such as Samsung and SK Hynix, which have substantial operations in China.
At the same time, the Biden administration is contemplating applying an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools to China. This rule prohibits the export of any product to a country if it is manufactured using a certain percentage of U.S. intellectual property.