South Korea is experiencing a rare productivity increase due to artificial intelligence, but escalating U.S.-China tensions over semiconductor technology may hinder its growth, according to Bank of America analysts.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports rising by more than 50% year-over-year, as indicated in a Bank of America Global Research report. Analysts believe that South Korea’s substantial investments in AI research and development, along with its increasing number of AI-related patents, will enhance the country’s adoption of AI in the long term.
Nevertheless, the analysts caution that geopolitical tensions could impact the semiconductor supply chain, particularly the ongoing friction between the U.S. and China, which may pose challenges to South Korea’s AI growth. While the country has shifted its chip exports away from China towards other regions, China and Hong Kong still accounted for over 30% of South Korea’s chip exports in 2023, with similar figures for exports to the U.S.
Bank of America analysts warned that if U.S.-China tensions escalate and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korean memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruptions in the supply chain due to geopolitical issues would complicate the ability of South Korean companies to acquire necessary manufacturing tools.
The U.S. has reportedly requested that South Korea limit its exports to China of equipment and technology for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are reportedly considering this request due to the potential impact on major national firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In a related development, the Biden administration is said to be contemplating the application of an export control measure known as the foreign direct product rule on allies who continue to supply chipmaking tools and equipment to China. This rule would prevent any goods that utilize a certain percentage of U.S. intellectual property from being exported to any other country.