South Korea stands out as one of the few economies globally experiencing a productivity surge linked to artificial intelligence (AI), although ongoing tensions between the U.S. and China regarding semiconductor industries could threaten its growth, according to analysts from Bank of America.
The semiconductor sector is crucial to South Korea’s economy, representing 17% of its exports. According to a report by Bank of America Global Research, the nation is reaping significant benefits from the AI boom, with semiconductor exports rising over 50% year-on-year. Analysts believe that South Korea’s substantial investment in AI research and development, coupled with an increasing number of AI-related patents, will enhance its position in the AI sector over time.
However, the analysts cautioned that geopolitical tensions, particularly those arising from the U.S.-China relationship, could negatively impact the semiconductor supply chain, hindering AI growth in South Korea. Although the country has diversified its chip exports beyond China, over 30% of its chip exports in 2023 were still to China and Hong Kong, with a similar percentage flowing to the U.S.
The report warns that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could seriously harm South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment needed for chip production. Disruptions in the supply chain due to heightened tensions could hinder these firms from obtaining the necessary tools to manufacture chips.
The U.S. has reportedly requested South Korea to limit exports to China of tools and technology used in the fabrication of memory chips and advanced logic chips, particularly those exceeding 14-nanometer and 18-nanometer specifications. South Korean officials are considering this request, recognizing the potential impact on major tech firms like Samsung and SK Hynix, which operate in China, its largest trading partner.
In parallel, it has been reported that the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule against allies that continue to supply chipmaking equipment to China. This regulation would prohibit the export of any goods produced using a specified percentage of U.S. intellectual property components to any country.