South Korea is experiencing a unique productivity boost from artificial intelligence (AI), although escalating tensions between the U.S. and China regarding semiconductor technology could hinder this growth, according to analysts at Bank of America.
The semiconductor sector makes up 17% of South Korea’s exports, and the nation has emerged as the primary benefactor of the AI surge, with exports increasing by over 50% year-over-year, as noted in a recent report from Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its standing in AI adoption over the long term.
However, the analysts caution that geopolitical conflicts may pose risks to the semiconductor supply chain, particularly the escalating discord between the U.S. and China, which could threaten AI growth in South Korea. While the country has taken steps to diversify its chip exports beyond China, the report reveals that China and Hong Kong accounted for more than 30% of its chip exports in 2023, with exports to the U.S. being roughly equivalent.
The analysts warned that if geopolitical tensions worsen and the U.S. imposes further trade limitations on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment required for chip production. Disruptions in the supply chain due to rising tensions could complicate the procurement of necessary tools for production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of tools and technology used in producing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly evaluating this request due to the potential effects on major domestic corporations like Samsung and SK Hynix, which have significant operations in China, the nation’s largest trading partner.
Additionally, the Biden administration is said to be contemplating the implementation of an export control measure known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any product to any country if it incorporates a certain percentage of U.S. intellectual property.