South Korea is experiencing a rare productivity increase attributed to artificial intelligence, according to analysts from Bank of America. However, they warn that ongoing tensions between the U.S. and China regarding semiconductor technologies could hinder the country’s growth.
The semiconductor sector, which comprises 17% of South Korea’s exports, has seen over a 50% year-over-year increase in exports, making South Korea a key beneficiary of the AI surge, as noted in a report from Bank of America Global Research. Analysts believe that the nation’s significant investments in AI research and development, along with a rising number of AI-related patents, will enhance its leadership in AI integration in the long run.
Nevertheless, the analysts cautioned that geopolitical issues could pose risks to the semiconductor supply chain, particularly as concerns grow over the U.S.-China relationship. Despite South Korea diversifying its semiconductor exports away from China to other regions, China and Hong Kong still represented over 30% of its chip exports in 2023, with exports to the U.S. accounting for a similar proportion.
If U.S.-China tensions worsen and the U.S. implements additional trade restrictions on advanced chips sold to China, it could severely impact South Korea’s memory semiconductor exports. Additionally, South Korean chipmakers rely on China for various chip-making components and equipment, meaning any disruptions in the supply chain could hinder their production capabilities.
The U.S. has reportedly requested that South Korea limit exports of equipment and technology used for manufacturing memory chips and advanced logic chips, specifically those with a complexity greater than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean authorities are reportedly contemplating this request due to the potential impacts on major domestic corporations, such as Samsung and SK Hynix, which have significant operations in China, its primary trading partner.
Simultaneously, the Biden administration is considering applying an export regulation known as the foreign direct product rule to allies that continue to supply chip-making tools to China. This regulation would prohibit the export of any product to any country if it incorporates a specified percentage of U.S. intellectual property.