South Korea is experiencing a rare boost in productivity driven by artificial intelligence, although rising tensions between the U.S. and China regarding semiconductor chips could hinder its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a leading beneficiary of the AI surge, with exports increasing by over 50% compared to the previous year, as stated in a Bank of America Global Research report. Analysts suggest that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will strengthen its positioning in AI adoption in the long run.
However, the report warns that geopolitical tensions could negatively impact the semiconductor supply chain, particularly as the friction intensifies between the U.S. and China. Although South Korea has been diversifying its chip exports beyond China, more than 30% of its chip exports in 2023 were directed to China and Hong Kong, with exports to the U.S. making up a similar proportion.
Bank of America analysts cautioned that if geopolitical tensions deteriorate and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could drastically affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Thus, any disruption in the supply chain resulting from heightened tensions would complicate the ability of South Korean companies to obtain the necessary tools for chip production.
Reports indicate that the U.S. has requested that South Korea limit exports of equipment and technology to China, particularly targeting memory chips and advanced logic chips that exceed specific technological thresholds. South Korean officials are reportedly considering the implications of the U.S. request, given the potential impact on major South Korean corporations, including Samsung and SK Hynix, which have significant operations in China.
Furthermore, the Biden administration is said to be contemplating the implementation of an export control mechanism, known as the foreign direct product rule, on allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any item to any country if it contains a particular percentage of U.S. intellectual property.