South Korea stands out as one of the few economies globally benefiting from a productivity increase driven by artificial intelligence, according to analysts from Bank of America. However, tensions between the U.S. and China regarding semiconductor technology could pose challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports, with the nation being the largest recipient of gains from the AI surge. Recent reports indicate that exports have surged over 50% year-on-year. Analysts believe that South Korea’s significant investments in AI research and development, along with a growing number of AI-related patents, will enhance its position in AI adoption over time.
Despite these positive trends, analysts caution that rising geopolitical tensions, particularly between the U.S. and China, could negatively impact the semiconductor supply chain, potentially hampering AI growth in South Korea. Although the country has diversified its chip exports away from China to other regions, more than 30% of its chip exports were still directed to China and Hong Kong in 2023, with a similar percentage going to the U.S.
Analysts from Bank of America warned that should tensions escalate and the U.S. implement further trade restrictions on advanced AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruptions in the supply chain due to geopolitical tensions would complicate access to essential tools needed for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology essential for the production of memory chips and advanced logic chips to China. South Korean officials are reportedly considering this request, mindful of the potential consequences for major firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In light of these developments, the Biden administration is also contemplating the implementation of an export control measure known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would restrict the export of any goods to any country if they are produced using a specified percentage of U.S. intellectual property.