South Korea is experiencing a rare productivity increase from artificial intelligence compared to other economies, though rising U.S.-China tensions regarding semiconductor chips may hinder its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has benefited significantly from the AI surge, with exports increasing more than 50% year-over-year, as revealed in a Bank of America Global Research report. Analysts predict that South Korea’s substantial investments in AI research and development and an increasing number of AI-related patents will enhance its AI adoption in the long run.
However, concerns arise over potential geopolitical issues impacting the semiconductor supply chain, particularly the escalating tensions between the U.S. and China, which could create challenges for AI growth in South Korea. The report highlights that, despite diversifying chip exports beyond China, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with approximately the same amount going to the U.S.
Bank of America analysts warned that if geopolitical tensions worsen and the U.S. implements further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential chipmaking components and equipment, meaning disruptions in these supply chains could complicate their production capabilities.
The U.S. has requested South Korea to limit its exports to China of machinery and technology utilized in making memory chips and advanced logic chips, specifically those beyond 14-nanometer and 18-nanometer specifications. South Korean officials are considering this request due to potential impacts on major companies like Samsung and SK Hynix, which have operations in China, South Korea’s primary trading partner.
Additionally, the Biden administration is reportedly contemplating the application of the foreign direct product rule, an export control strategy targeting allies that continue to supply chipmaking tools to China. This rule would prevent the export of any product manufactured with a specific percentage of U.S. intellectual property components to any country.