South Korea is experiencing a notable increase in productivity driven by artificial intelligence, but rising tensions between the U.S. and China regarding semiconductor technology may pose risks to this growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant benefactor of the AI phenomenon, with export growth surpassing 50% year-over-year. The analysts from Bank of America Global Research project that South Korea’s substantial investment in AI research and development, along with an increasing array of AI-related patents, will further strengthen its standing in AI adoption.
However, the analysts caution that geopolitical tensions, particularly the ongoing friction between the U.S. and China, could impact the semiconductor supply chain and hinder AI growth in South Korea. Despite efforts to diversify chip exports beyond China to other areas, over 30% of South Korea’s chip exports in 2023 still went to China and Hong Kong. Exports to the U.S. accounted for a similar proportion.
If geopolitical tensions escalate and the U.S. implements additional trade restrictions on advanced or AI-related chip exports to China, it may severely affect South Korea’s memory semiconductor exports, the analysts noted.
Moreover, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Any disruption in the supply chain due to heightened tensions could complicate access to essential tools for these firms.
Additionally, reports indicate that the U.S. has 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 advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly deliberating this request amid concerns over potential impacts on major firms such as Samsung and SK Hynix, both of which have significant operations in China, their largest trading partner.
Furthermore, the Biden administration is mulling the implementation of an export control mechanism known as the foreign direct product rule on allies who continue supplying chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any country if they are produced using a specified percentage of U.S. intellectual property components.