South Korea is experiencing a productivity increase linked to artificial intelligence, distinguishing it as one of the few economies benefiting from this trend, according to analysts at Bank of America. However, tensions between the U.S. and China over semiconductor technologies may pose significant challenges to the country’s growth.
The semiconductor sector represents 17% of South Korea’s exports, and it has seen a remarkable boost, with exports rising over 50% year-on-year, as detailed in a report by Bank of America Global Research. Analysts predict that South Korea’s substantial investments in AI research and development, alongside an increasing number of AI-related patents, will enhance its competitive position in AI adoption over time.
Despite these positive developments, the analysts caution that geopolitical tensions, particularly those arising from U.S.-China relations, could negatively impact the semiconductor supply chain. Although South Korea has made strides in diversifying its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with a similar proportion going to the U.S.
If U.S. geopolitical tensions escalate and result in further trade restrictions on advanced or AI-related chip exports to China, there may be severe repercussions for South Korea’s memory semiconductor exports, the analysts warned.
Moreover, South Korean chip manufacturers heavily rely on China for certain components and equipment necessary for chip production. Any disruption in the supply chain due to these tensions could hinder South Korean companies’ ability to acquire essential production tools.
The U.S. government has reportedly requested that South Korea limit exports of equipment and technology pertinent to manufacturing memory chips and advanced logic chips aimed at China. South Korean officials are evaluating this request due to potential impacts on major domestic companies, such as Samsung and SK Hynix, which have significant operations within China, its largest trading partner.
Additionally, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule against allies that continue to supply China with chipmaking tools and equipment. This regulation would prevent the export of any goods manufactured using a certain threshold of U.S. intellectual property components to any nation.