South Korea is experiencing a productivity increase linked to artificial intelligence, making it one of the few economies globally to do so. However, escalating tensions between the U.S. and China over semiconductor supplies may present challenges to this growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s total exports, and a report from Bank of America Global Research highlights that the nation has significantly benefited from the AI surge, with exports rising by over 50% compared to the previous year. Analysts express optimism regarding South Korea’s substantial investments in AI research and development, as well as an increasing number of AI-related patents, which are expected to enhance the country’s capacity for AI implementation in the future.
Nevertheless, the report warns that heightened geopolitical tensions, particularly between the U.S. and China, could adversely affect the semiconductor supply chain and present challenges to South Korea’s AI advancement. Despite diversifying its chip exports beyond China, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with similar figures for exports to the U.S.
The Bank of America analysts noted that if political strains intensify, leading the U.S. to ramp up trade restrictions on advanced or AI-related chip exports to China, it could severely impact Korea’s memory semiconductor industry.
Additionally, South Korean manufacturers rely on China for critical components and equipment necessary for chip production. Disruptions in supply chains resulting from geopolitical tensions could hinder South Korean firms from obtaining the essential tools for their manufacturing processes.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology used for producing memory chips and advanced logic chips to China. This includes restrictions on logic chips more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are allegedly deliberating over this request due to potential consequences for major companies like Samsung and SK Hynix that operate within China, its key trading partner.
Simultaneously, the Biden administration is reportedly considering implementing an export control called the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any product manufactured using a certain percentage of U.S. intellectual property to any country.