South Korea’s economy is experiencing a productivity surge driven by artificial intelligence, although potential challenges due to U.S.-China tensions regarding semiconductor supplies could impact this growth, according to analysts from Bank of America.
A recent report highlights that the semiconductor sector constitutes 17% of South Korea’s exports, and the nation has benefited significantly from the AI boom, with exports increasing by over 50% year-over-year. Analysts project that South Korea’s substantial investments in AI research and development, alongside a growing portfolio of AI-related patents, will further enhance its leadership in AI adoption.
However, the analysts caution that escalating geopolitical tensions could negatively affect the semiconductor supply chain. Despite South Korea’s efforts to diversify chip exports beyond China, the country and Hong Kong still accounted for more than 30% of its chip exports in 2023, matching the percentage sent to the U.S.
If tensions escalate and the U.S. enacts further trade restrictions on advanced or AI-related semiconductor exports to China, it could severely impact South Korea’s memory semiconductor exports, warn Bank of America analysts.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruption in the supply chain due to rising tensions would hinder these companies’ ability to acquire essential tools for chip production.
Amid these developments, reports suggest that the U.S. has urged South Korea to limit exports to China of equipment and technologies for producing advanced memory chips and chips more sophisticated than 14-nanometers. South Korean officials are reportedly considering the U.S. request, mindful of potential consequences for major firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Furthermore, the Biden administration is contemplating applying an export control known as the foreign direct product rule to allies who continue to sell chipmaking equipment and technology to China. This rule would prevent the export of any goods made using a certain percentage of U.S. intellectual property components to any country.