South Korea is experiencing a unique productivity boost from artificial intelligence, although rising tensions between the U.S. and China regarding semiconductor technology may pose a challenge to its growth, according to analysts at Bank of America.
The semiconductor sector represents a significant portion of South Korea’s economy, making up 17% of its exports. The country has emerged as a leading beneficiary of the AI boom, with exports increasing by over 50% compared to the previous year. Bank of America Global Research suggests that South Korea’s substantial investment in AI research and development, coupled with a surge in AI-related patents, will enhance its position in AI adoption over the long term.
Nevertheless, analysts caution that escalating geopolitical tensions could negatively impact the semiconductor supply chain. The ongoing friction between the U.S. and China is a particular concern, as more than 30% of South Korea’s chip exports were directed to China and Hong Kong in 2023, with exports to the U.S. being comparable.
If U.S.-China tensions were to escalate, and if the U.S. imposes further trade restrictions on advanced AI-related chips exported to China, this could significantly impact South Korea’s memory semiconductor exports. South Korean chip manufacturers also rely on China for certain components and equipment essential for chip production. Disruptions in the supply chain due to political tensions could complicate South Korean firms’ access to necessary production tools.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology necessary for manufacturing advanced memory chips and logic chips that exceed specified technological thresholds. South Korean officials are considering this request, recognizing the potential impacts on major corporations such as Samsung and SK Hynix, which have significant operations in China.
In addition, the Biden administration is reportedly contemplating the implementation of an export control mechanism, known as the foreign direct product rule, aimed at allies that continue to sell chipmaking tools to China. This rule would prevent the export of any goods made using a certain percentage of U.S. intellectual property to any country.