South Korea is experiencing a notable productivity increase from artificial intelligence, making it one of the few economies benefiting from the AI boom, according to Bank of America analysts. However, escalating tensions between the U.S. and China regarding semiconductor chips could pose risks to the country’s growth prospects.
The semiconductor sector represents 17% of South Korea’s exports, and recent reports indicate that South Korean exports related to AI have surged by over 50% year-on-year. Analysts anticipate that the nation’s substantial investments in AI research and development, along with a rise in AI-related patents, will enhance its competitive edge in AI adoption moving forward.
Nonetheless, potential geopolitical issues may impact the semiconductor supply chain, particularly the ongoing friction between the U.S. and China. Despite diversifying its chip exports beyond China, over 30% of South Korea’s chip exports were directed to China and Hong Kong in 2023, which is comparable to the volume sent to the U.S.
Bank of America analysts warn that if U.S.-China tensions intensify and the U.S. imposes stricter trade limitations on advanced or AI-related chip exports to China, it could severely affect South Korean exports in memory semiconductors. Additionally, South Korean chip manufacturers rely on China for critical components and equipment for chip production. Disruptions in the supply chain due to geopolitical strains could hinder their ability to obtain essential manufacturing tools.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, specifically those exceeding 14-nanometer and 18-nanometer specifications, respectively. South Korean officials are contemplating the implications of the U.S. request, considering the impact on major domestic companies like Samsung and SK Hynix, which have operations in China, its largest trading partner.
In related developments, the Biden administration is said to be considering implementing an export control mechanism known as the foreign direct product rule on allies that continue to provide chipmaking tools and equipment to China. This rule would prohibit the export of any goods made with a certain percentage of U.S. intellectual property components to any country.