South Korea is experiencing one of the few productivity increases globally driven by artificial intelligence, though the ongoing tensions between the U.S. and China over semiconductor chips may hinder its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports and the nation has benefitted significantly from the AI surge, witnessing a year-over-year export increase of over 50%, a Bank of America Global Research report indicates. Analysts predict that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption in the long run.
However, the analysts caution that potential geopolitical tensions could impact the semiconductor supply chain, particularly in light of the escalating U.S.-China tensions, which could pose challenges for AI advancement in South Korea. While the country has started to shift its chip exports away from China towards other regions, over 30% of its chip exports in 2023 originated from China and Hong Kong, according to the report. Shipments to the U.S. comprised a similar percentage.
Bank of America analysts warn that if geopolitical tensions rise and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could significantly impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for some components and equipment used in chip production. Any disruption in the supply chain due to heightened tensions could make it increasingly difficult for South Korean companies to acquire the necessary tools to manufacture chips.
Reports state that the U.S. has asked South Korea to limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, particularly those with specifications surpassing 14-nanometers for logic chips and 18-nanometers for DRAM memory chips. South Korean officials are reportedly considering this request, weighing potential repercussions for major firms like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
In related news, the Biden administration is contemplating the use of an export control mechanism known as the foreign direct product rule against allies that continue to provide chipmaking tools and equipment to China. This rule prohibits the export of any product made with a certain level of U.S. intellectual property components to any nation.