South Korea is experiencing one of the few positive productivity boosts from artificial intelligence globally, although rising tensions between the U.S. and China over semiconductor supply could impact its growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s total exports, and the nation is considered the biggest beneficiary of the AI surge, with exports rising over 50% year-on-year, as indicated in a recent report by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing array of AI-related patents, will enhance its standing in AI adoption.
However, the analysts warned that escalating geopolitical tensions, particularly between the U.S. and China, could impact the supply chain for semiconductors, presenting a challenge to AI development in South Korea. Despite South Korea diversifying its chip exports to regions beyond China, the report notes that over 30% of its chip exports in 2023 were directed to China and Hong Kong, while exports to the U.S. were roughly equivalent.
The analysts cautioned that if geopolitical tensions worsen and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could significantly harm South Korea’s memory semiconductor exports.
Additionally, South Korean semiconductor manufacturers rely on China for various components and chipmaking tools. Any disruption in the supply chain could complicate their access to essential equipment needed for chip production.
Reports suggest the U.S. has urged South Korea to limit exports of chipmaking technology and equipment to China, specifically for advanced memory chips and logic chips that exceed certain specifications. South Korean officials are reportedly considering the U.S. request due to potential ramifications for leading companies like Samsung and SK Hynix, which have operations in China, their largest trading partner.
At the same time, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule against allies who continue to supply semiconductor manufacturing tools to China. This rule would prevent any goods from being exported to any country if they include a designated percentage of U.S. intellectual property in their production.