South Korea is experiencing a productivity increase driven by artificial intelligence, distinguishing it as one of the few economies benefiting from this technology, according to analysts at Bank of America. However, tensions between the U.S. and China regarding semiconductor chips may pose risks to South Korea’s growth.
The semiconductor sector is crucial for South Korea, representing 17% of its exports. A recent report from Bank of America Global Research highlights that the country has seen a greater than 50% year-over-year rise in exports, positioning it as the top beneficiary of the AI boom. The report forecasts that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its standing in AI adoption over the long term.
Nevertheless, analysts caution that geopolitical tensions, particularly those escalating between the U.S. and China, could negatively impact the semiconductor supply chain. Although South Korea has shifted some chip exports away from China to other regions, over 30% of its chip exports still went to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar percentage.
The analysts warned that should geopolitical strains intensify and the U.S. introduces further trade barriers on advanced or AI-related chip exports to China, it could significantly affect South Korean memory chip exports. Additionally, South Korean semiconductor manufacturers rely on China for certain components and equipment used in chip production. Any disruption caused by rising tensions could hinder their ability to source essential production tools.
The U.S. has reportedly urged South Korea to limit the export of equipment and technology to China for producing memory chips and advanced logic chips, particularly those exceeding 14-nanometer and 18-nanometer specifications. South Korean officials are considering this request due to the potential impact on major companies such as Samsung and SK Hynix, which have operations in China, its largest trade partner.
Simultaneously, the Biden administration is contemplating applying an export control known as the foreign direct product rule on allies that persist in selling chipmaking tools to China. This regulation would prohibit the export of any good derived from certain percentages of U.S. intellectual property to any nation.