South Korea stands out as one of the few economies experiencing a productivity increase driven by artificial intelligence (AI), according to analysts from Bank of America. However, they caution that ongoing tensions between the United States and China regarding semiconductor supplies could hinder this growth.
The semiconductor sector is crucial to the South Korean economy, making up 17% of its exports. A recent report from Bank of America Global Research highlights that South Korea has reaped substantial benefits from the AI surge, reporting a year-over-year export increase of over 50%. Analysts anticipate that the country’s significant investments in AI research and development, along with a rising number of AI-related patents, will bolster its position in AI implementation over the long term.
Nonetheless, the analysts warned that escalating geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain, thereby posing challenges to AI advancements in South Korea. Despite efforts to diversify chip exports beyond China, over 30% of South Korea’s chip exports in 2023 were still directed to China and Hong Kong, with a similar figure for exports to the U.S.
Bank of America analysts noted that if geopolitical tensions worsen and the U.S. enacts further trade restrictions on advanced semiconductors destined for China, it could severely affect Korea’s memory chip exports. South Korea’s chip manufacturers also rely on China for essential components and equipment. Thus, any disruption in the supply chain could complicate the ability of South Korean firms to obtain the necessary tools for chip production.
The U.S. has reportedly requested that South Korea restrict exports of equipment and technology used to manufacture memory and advanced logic chips to China, specifically targeting advanced logic chips beyond 14-nanometer and DRAM memory chips greater than 18-nanometer. South Korean officials are considering this request, weighing the potential impact on major domestic companies like Samsung and SK Hynix, which have operations in China, their largest trade partner.
Additionally, the Biden administration is contemplating the implementation of an export control, known as the foreign direct product rule, aimed at allies who continue to sell semiconductor manufacturing tools and equipment to China. This rule would prohibit the export of any product made with a specific percentage of U.S. intellectual property to any country.