South Korea is experiencing a notable boost in productivity due to advancements in artificial intelligence, but analysts at Bank of America caution that rising tensions between the U.S. and China over semiconductor technology could pose challenges to this growth.
According to a report by Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, with the nation identified as a leading beneficiary of the AI boom, witnessing over a 50% increase in exports year-over-year. Analysts believe that the country’s significant investments in AI research and development, along with an increase in AI-related patents, will enhance its position in AI adoption over time.
However, the report highlights that geopolitical strains may impact the semiconductor supply chain, particularly the escalating friction between the U.S. and China, which could hinder AI growth in South Korea. Despite efforts to diversify chip exports beyond China, over 30% of South Korea’s chip exports in 2023 went to China and Hong Kong, with a similar percentage directed to the U.S.
The analysts warned that if geopolitical tensions were to escalate and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s 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 heightened tensions could complicate access to the necessary tools for chipmaking.
The U.S. has reportedly urged South Korea to limit exports to China of essential equipment and technology for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are evaluating the U.S. request, considering the potential impact on major South Korean corporations like Samsung and SK Hynix, which have significant operations in China—their largest trading partner.
Moreover, the Biden administration is contemplating applying an export control measure known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This regulation would prohibit the export of any goods manufactured with a specified percentage of U.S. intellectual property to any nation.