South Korea stands out as one of the few economies experiencing an uptick in productivity attributed to artificial intelligence, according to analysts at Bank of America. They note that while the nation benefits significantly from the AI boom, challenges loom due to escalating tensions between the U.S. and China, particularly in the semiconductor sector.
The semiconductor industry plays a vital role in South Korea’s economy, constituting 17% of its total exports. Bank of America Global Research reports that the country has seen over a 50% increase in semiconductor exports year-over-year, marking it as a primary beneficiary of the AI surge. Analysts are optimistic about South Korea’s substantial investments in AI research and development, along with a growing number of AI-related patents, suggesting that the country is likely to strengthen its position in AI adoption in the long run.
Nevertheless, concerns remain regarding geopolitical tensions that could impact the semiconductor supply chain. Despite diversifying chip exports beyond China, over 30% of South Korea’s chip exports were directed towards China and Hong Kong in 2023, with a similar percentage aimed at the U.S. Analysts warn that if U.S.-China relations deteriorate further, particularly with potential new trade restrictions on AI-related chips, it could adversely affect South Korea’s memory semiconductor exports.
South Korean manufacturers also rely on China for certain chipmaking components and equipment. Therefore, any disruptions stemming from geopolitical friction might hinder their ability to procure essential tools for chip production.
Recently, the U.S. has requested South Korea to impose restrictions on exports of equipment and technology used to manufacture advanced memory chips to China. South Korean officials are contemplating this request, balancing potential implications for major tech players like Samsung and SK Hynix, which have significant operations in China.
Additionally, the Biden administration is evaluating the implementation of an export control measure called the foreign direct product rule against allies that continue supplying chip-making tools and equipment to China. This regulation would prevent the export of any product made using a specific percentage of U.S. intellectual property.
In summary, while South Korea’s position as a leader in AI-driven productivity presents tremendous potential, its semiconductor sector could face challenges due to geopolitical dynamics. The ongoing developments may necessitate careful navigation by South Korea to maintain its growth trajectory in the face of external pressures.
This scenario underscores the importance of international cooperation in technology and trade, suggesting that collaboration between countries may be key to overcoming these challenges and ensuring sustained growth.