South Korea is experiencing a notable productivity increase driven by artificial intelligence, but escalating tensions between the U.S. and China regarding semiconductor technologies could hinder this growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI surge, boasting a year-over-year increase in exports exceeding 50%. Analysts believe that South Korea’s substantial investment in AI research and development and the rising number of AI-related patents will enhance its role in AI adoption.
However, concerns have been raised about potential geopolitical tensions impacting the semiconductor supply chain, particularly amid the ongoing discord between the U.S. and China. Despite efforts to diversify chip exports away from China, the report indicates that over 30% of South Korea’s chip exports in 2023 went to China and Hong Kong, with exports to the U.S. being roughly equivalent.
Bank of America analysts caution that if geopolitical tensions escalate and the U.S. were to implement further trade restrictions on AI-related chip exports to China, it could severely detriment South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Should tensions disrupt the supply chain, it would complicate the procurement of necessary manufacturing tools for South Korean firms.
The U.S. has reportedly requested that South Korea limit exports to China of machinery and technology used for producing memory chips and advanced logic chips, particularly those exceeding 14-nanometer technology and DRAM memory chips larger than 18 nanometers. South Korean officials are considering this request in light of potential repercussions for major companies like Samsung and SK Hynix, which have operations in China, its largest trading partner.
Additionally, the Biden administration is contemplating implementing an export control known as the foreign direct product rule, targeting allies that continue to sell chipmaking technologies to China. This regulation would prevent the export of any product to any nation if it incorporates a specified percentage of U.S. intellectual property in its manufacturing process.