South Korea is experiencing a notable productivity increase due to artificial intelligence, according to Bank of America analysts. However, rising tensions between the United States and China concerning semiconductor technology could hinder this growth.
The semiconductor sector makes up 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI boom, with exports rising by over 50% year-over-year. The analysts predict that South Korea’s substantial investments in AI research and development, along with a surge in AI-related patents, will enhance its position in AI adoption in the long run.
Nonetheless, the analysts caution that geopolitical tensions might impact the semiconductor supply chain, particularly due to escalating U.S.-China conflicts. Although South Korea has started diversifying its chip exports away from China, more than 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being similar.
The analysts warned that if geopolitical tensions worsen and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely affect Korea’s memory semiconductor exports. South Korean chip manufacturers also rely on China for certain components and equipment needed for chip production; therefore, supply chain disruptions could complicate their manufacturing processes.
In response to these tensions, the U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM chips beyond 18-nanometer. South Korean officials are considering this request due to potential impacts on major firms like Samsung and SK Hynix, which have operations in China, its most significant trading partner.
Additionally, the Biden administration is contemplating implementing an export control known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This regulation would restrict the export of any goods manufactured with a specific percentage of U.S. intellectual property.