South Korea is currently experiencing a unique productivity surge driven by artificial intelligence, although tensions between the U.S. and China concerning semiconductor chips may pose challenges to this growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and as per a report from Bank of America Global Research, the nation has emerged as the largest benefactor of the AI boom, witnessing a year-on-year export increase of over 50%. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will bolster the country’s position in AI adoption over the long term.
However, the analysts caution that escalating geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain, thereby affecting South Korea’s AI growth prospects. Despite South Korea’s efforts to diversify its chip exports away from China to other regions, over 30% of its semiconductor exports in 2023 were still directed towards China and Hong Kong, which mirrors the volume of exports to the United States.
Bank of America analysts noted that if geopolitical tensions intensify and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, this could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various components and equipment required in chip production. Thus, disruptions in the supply chain due to escalating tensions could complicate access to essential tools needed for manufacturing chips.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology for manufacturing memory chips and advanced logic chips, specifically those exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request, keeping in mind the potential effects on major local corporations, including Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is contemplating the implementation of 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 prohibit the export of any goods to any country if they are produced using a specific percentage of U.S. intellectual property components.