South Korea is experiencing a notable productivity increase fueled by artificial intelligence, according to analysts from Bank of America. However, the ongoing tensions between the U.S. and China regarding semiconductor trade pose potential challenges to this growth.
The semiconductor sector accounts for 17% of South Korea’s exports, and the country has emerged as the leading beneficiary of the AI boom, with exports rising by over 50% year-on-year as reported by Bank of America Global Research. Analysts believe that South Korea’s significant investments in AI research and development, coupled with an increasing number of AI-related patents, will bolster its position in AI adoption moving forward.
Nonetheless, analysts warn that geopolitical tensions might impose constraints on the semiconductor supply chain, particularly as relations between the U.S. and China worsen. While South Korea has diversified its chip exports to markets outside of China, over 30% of its chip exports still went to China and Hong Kong in 2023, similar to the magnitude of exports to the U.S.
Should geopolitical tensions escalate and the U.S. impose further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports, according to Bank of America analysts.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Any disruption in these supply chains caused by rising tensions could hinder South Korean companies’ access to essential production tools.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology necessary for producing memory chips and advanced logic chips to China, specifically targeting logic chips more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly deliberating this request, considering the potential ramifications for major South Korean companies like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In other developments, the Biden administration is reportedly contemplating the use 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 goods to any country if they are manufactured with a certain percentage of U.S. intellectual property components.