South Korea is experiencing a notable increase in productivity due to artificial intelligence, although escalating tensions between the U.S. and China regarding semiconductor trade may pose risks to this growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI boom, with exports rising over 50% year-over-year, as reported by Bank of America’s Global Research team. Analysts predict that South Korea’s substantial investment in AI research and development and its increasing number of AI-related patents will enhance its position in AI adoption over the long term.
However, analysts cautioned that potential geopolitical conflicts could impact the semiconductor supply chain, particularly stemming from the ongoing U.S.-China tensions. Although South Korea has made efforts to diversify its chip exports beyond China, the country, along with Hong Kong, accounted for more than 30% of South Korea’s chip exports in 2023, with exports to the U.S. being comparable.
Bank of America analysts warned that should geopolitical tensions escalate, and the U.S. impose further trade restrictions on the export of advanced or AI-related chips to China, it could substantially harm South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruptions in the supply chain due to rising tensions could complicate access to essential tools needed for chip production.
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, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request due to the potential effects on major companies such as Samsung and SK Hynix, which have operations in China, its largest trading partner.
In related developments, the Biden administration is contemplating applying an export control known as the foreign direct product rule to allies that continue to sell chipmaking tools and equipment to China. This rule prevents the export of goods to any country if they contain a specified percentage of U.S. intellectual property components.