South Korea is experiencing a notable productivity increase attributed to artificial intelligence, but analysts from Bank of America caution that rising tensions between the U.S. and China regarding semiconductors could hinder this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports reportedly increasing over 50% year-over-year. Analysts project that South Korea’s substantial investments in AI research and development, coupled with a rise in AI-related patents, will further enhance its position in AI integration.
However, potential geopolitical conflicts pose risks to the semiconductor supply chain, particularly in light of the escalating U.S.-China tensions. Despite South Korea diversifying its chip exports beyond China, the report notes that over 30% of its chip exports in 2023 were directed to China and Hong Kong, with similar figures for exports to the U.S.
Should the geopolitical situation deteriorate, particularly if the U.S. imposes further trade restrictions on advanced or AI-related semiconductor exports to China, the repercussions for South Korean memory chip exports could be significant.
Moreover, South Korean semiconductor manufacturers rely on China for various components and equipment needed for chip production. Any disruptions to the supply chain resulting from escalating tensions would complicate the acquisition of essential production tools for these firms.
The U.S. has reportedly requested that South Korea limit exports to China of technology and equipment required for producing memory chips and advanced logic chips, specifically those exceeding 14-nanometer and 18-nanometer thresholds. South Korean officials are contemplating this request due to the potential impacts on major companies like Samsung and SK Hynix, which have operations in China, South Korea’s largest trade partner.
In addition, the Biden administration is exploring the possibility of implementing an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prevent exports of goods produced with a specified percentage of U.S. intellectual property components to any country.