South Korea is experiencing a unique productivity increase attributed to artificial intelligence, according to analysts from Bank of America. However, escalating tensions between the U.S. and China regarding semiconductor exports could pose a potential threat to its growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI boom, with exports rising over 50% year-over-year, as highlighted in a report by Bank of America Global Research. Analysts believe that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will enhance its standing in AI integration in the long run.
Nevertheless, the analysts cautioned that geopolitical tensions might impact the semiconductor supply chain, particularly due to the strained relationship between the U.S. and China. Although South Korea has worked to diversify its chip exports from China to other regions, over 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being similar.
If geopolitical tensions escalate further and the U.S. imposes additional trade sanctions on advanced or AI-related chip exports to China, this move could significantly affect South Korea’s memory semiconductor exports, the analysts warned.
Additionally, South Korean chip manufacturers rely on China for various components and equipment essential for chip production. Disruptions in these supply chains due to rising tensions could complicate the procurement of necessary tools for manufacturing semiconductors.
Reports indicate that the U.S. has asked South Korea to limit exports to China concerning equipment and technology for producing memory chips and advanced logic chips, particularly those more advanced than 14-nanometers or DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly contemplating this request, considering the potential impact on major South Korean companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In the meantime, the Biden administration is evaluating using an export control mechanism known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prevent any goods from being exported if they are manufactured using a specified percentage of U.S. intellectual property components.