South Korea is experiencing a notable productivity increase driven by artificial intelligence, although rising tensions between the U.S. and China over semiconductor issues could hinder its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, positioning the country as a significant beneficiary of the AI surge, with exports rising more than 50% year-over-year, as stated in a report by Bank of America Global Research. Analysts believe that South Korea’s substantial investment in AI research and development, coupled with a growing number of AI-related patents, will bolster its AI adoption in the future.
However, the report cautions that geopolitical tensions might impact the semiconductor supply chain, particularly due to escalating conflicts between the U.S. and China, which pose risks to South Korea’s AI expansion. Although South Korea has sought to diversify its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being roughly equivalent.
The analysts warn that if the U.S. increases trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports. South Korean chip manufacturers are also reliant on China for certain chipmaking components and equipment. Consequently, any disruption in this supply chain due to geopolitical tensions could hinder the ability of South Korean companies to secure necessary production tools.
Additionally, the U.S. has reportedly urged South Korea to limit exports to China of equipment and technology for producing both memory chips and advanced logic chips, particularly those with technology more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean policymakers are reportedly assessing the U.S. request, considering the potential impact on major domestic firms such as Samsung and SK Hynix, which maintain operations in China, its largest trading partner.
In parallel, the Biden administration is contemplating applying an export control mechanism known as the foreign direct product rule to allies that continue supplying chipmaking tools and equipment to China. This regulation would prohibit the export of any goods to any country if they are manufactured using a specific percentage of U.S. intellectual property components.