South Korea is currently experiencing a productivity boost from artificial intelligence, making it one of the few economies to do so, according to analysts from Bank of America. However, tensions between the U.S. and China over semiconductor technology may pose significant challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports and the country has emerged as a leader in the AI market, with exports surging by over 50% year-on-year. Bank of America’s Global Research report indicates that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, are expected to further enhance its AI adoption.
Despite these positive indicators, the analysts caution that geopolitical tensions could impact the semiconductor supply chain. The ongoing friction between the U.S. and China could hinder AI advancements in South Korea. Although South Korea has started to diversify its chip exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with the U.S. receiving a similar proportion.
The analysts noted that any escalation in geopolitical tensions, particularly if the U.S. were to impose further trade restrictions on advanced or AI-related chip exports to China, could have a detrimental effect on South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Disruptions in the supply chain due to geopolitical tensions could make it challenging for South Korean companies to obtain the necessary tools for chip production.
Reports indicate that the U.S. has requested that South Korea limit exports to China of equipment and technology utilized in manufacturing memory chips and advanced logic chips. South Korean officials are reportedly evaluating this request, considering the potential implications for major domestic firms like Samsung and SK Hynix, both of which have operations in China, South Korea’s largest trading partner.
In addition, the Biden administration is said to be contemplating an export control measure known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any goods manufactured with a specified percentage of U.S. intellectual property content to any country.