South Korea is experiencing a productivity surge linked to artificial intelligence, making it one of the few economies globally to benefit significantly from the AI boom, according to analysts from Bank of America. However, they caution that rising U.S.-China tensions surrounding semiconductor technology could hinder this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has seen more than a 50% increase in exports year-over-year, attributed to the AI surge. Bank of America analysts believe that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will enhance its position in AI integration over the long term.
Despite these optimistic projections, the analysts warn that geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain. Although South Korea has begun diversifying its chip exports away from China to other regions, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with exports to the U.S. being approximately the same.
Should U.S.-China tensions escalate and lead to further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory chip exports, as noted by Bank of America analysts.
Furthermore, South Korean chipmakers also rely on China for various components and equipment. Any disruptions in this supply chain due to geopolitical tensions would make it difficult for these manufacturers to acquire necessary production tools.
Reports indicate that the U.S. has requested South Korea to limit exports of semiconductor-making equipment and technology to China, targeting advanced logic chips more sophisticated than 14-nanometer processes and DRAM memory chips beyond 18-nanometer technology. South Korean authorities are reportedly evaluating this request, considering the potential consequences for major companies like Samsung and SK Hynix, both of which have operations in China, its largest trading partner.
Additionally, the Biden administration is mulling the implementation of an export control called the foreign direct product rule, which would restrict allies from selling chipmaking tools and equipment to China. This rule would prevent the export of any product manufactured with a certain percentage of U.S. intellectual property to any country.