South Korea is experiencing a notable boost in productivity from artificial intelligence, distinguishing it as one of the few economies benefiting from this advancement. However, analysts from Bank of America cautioned that escalating U.S.-China tensions regarding semiconductor chips could impede this growth.
According to a recent report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports. The nation has emerged as the primary beneficiary of the AI boom, with a more than 50% increase in exports year-over-year. Analysts believe that South Korea’s significant investment in AI research and development, coupled with an increasing number of AI-related patents, is likely to enhance its position in AI adoption in the future.
Despite these positive indicators, the report warns that geopolitical tensions may negatively impact the semiconductor supply chain, especially amid rising conflicts between the U.S. and China. Although South Korea has been diversifying its chip exports to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being similarly substantial.
Bank of America analysts emphasized that any escalation in geopolitical tensions, particularly if the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, could severely harm South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Should tensions disrupt the supply chain, it could complicate the ability of these firms to acquire the necessary tools for manufacturing chips.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, specifically those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating this request due to its potential impact on major domestic companies, such as Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
Additionally, the Biden administration is reportedly evaluating the use of an export control known as the foreign direct product rule against allies continuing to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any nation if they are manufactured with a specified percentage of U.S. intellectual property components.