South Korea is experiencing a productivity boost from artificial intelligence, making it one of the few economies in the world benefiting from the AI surge, according to analysts from Bank of America. However, rising U.S.-China tensions over semiconductor supplies could pose challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has seen over a 50% increase in AI-related exports year-over-year. The analysts believe that South Korea’s substantial investment in AI research and development, along with a growing number of AI patents, will enhance its position in AI adoption in the long run.
Despite this positive outlook, analysts warn that escalating geopolitical tensions, particularly between the U.S. and China, could negatively impact the semiconductor supply chain. While South Korea has worked to diversify its chip exports beyond China, the report notes that China and Hong Kong still accounted for over 30% of its chip exports in 2023, with exports to the U.S. being roughly equivalent.
The analysts indicated that if geopolitical tensions worsen and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could critically affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in this supply chain could complicate the ability of South Korean firms to procure the essential tools for chip manufacturing.
The U.S. government has reportedly requested South Korea to limit exports to China of equipment and technology for producing memory and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request, mindful of the potential impact on major domestic companies like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule restricts the export of goods made with a certain percentage of U.S. intellectual property to any country.