South Korea is experiencing a unique productivity boost from artificial intelligence, according to analysts from Bank of America, although tensions between the U.S. and China regarding semiconductor chips may pose challenges to this growth.
The semiconductor sector is crucial for the South Korean economy, making up 17% of its exports. Bank of America Global Research noted that the country has emerged as a significant beneficiary of the AI revolution, with exports soaring more than 50% year-over-year. Analysts are optimistic about South Korea’s substantial investments in AI research and development, as well as an increasing number of AI-related patents, which they believe will enhance its position in AI implementation.
However, potential geopolitical issues could impact the semiconductor supply chain, particularly the escalating tensions between the U.S. and China. Although South Korea has diversified its chip exports away from China to other markets, China and Hong Kong still accounted for over 30% of its chip exports in 2023, with a similar percentage directed to the U.S.
Bank of America analysts cautioned that if geopolitical tensions rise and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, South Korea’s memory semiconductor exports could suffer significantly.
South Korean chip manufacturers also rely on China for certain components and equipment necessary for chip production. Any disruption in the supply chain due to these tensions could hinder the ability of South Korean firms to obtain crucial tools for chip manufacturing.
Additionally, reports suggest that the U.S. has requested South Korea to limit exports to China of specific equipment and technology for memory chips and advanced logic chips, particularly those more advanced than 14-nanometers and DRAM memory chips over 18-nanometers. South Korean officials are reportedly considering this request, mindful of the potential consequences for major companies like Samsung and SK Hynix, which have operations in China, the nation’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating implementing an export control measure known as the foreign direct product rule aimed at allies that continue to supply chipmaking tools to China. This rule would restrict the export of goods to any nation if they incorporate a specified percentage of U.S. intellectual property.