South Korea is experiencing a unique productivity increase attributed to artificial intelligence, according to analysts from Bank of America. However, rising tensions between the U.S. and China concerning semiconductor technology may threaten this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation is benefiting significantly from the AI surge, with exports rising over 50% year-over-year, as indicated in a recent Bank of America Global Research report. Analysts suggest that South Korea’s substantial investment in AI research and development and the increasing number of AI-related patents will enhance its position in the realm of AI adoption over the long term.
Nonetheless, the analysts warn that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly due to escalating U.S.-China tensions, which could pose a challenge to South Korea’s AI advancements. Despite efforts to diversify chip exports away from China, over 30% of its semiconductor exports in 2023 were still directed toward China and Hong Kong, with a similar percentage going to the U.S.
The report cautioned that if geopolitical tensions escalate further and the U.S. enforces additional trade limitations on advanced or AI-related chip exports to China, it could have serious adverse effects on Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various components and equipment used in chip production. Should these tensions disrupt the supply chain, acquiring the necessary tools for chip manufacturing would become challenging for South Korean companies.
The U.S. has reportedly requested that South Korea impose restrictions on exports of equipment and technology used in producing memory chips and advanced logic chips, specifically for chips more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean authorities are reportedly considering this request in light of potential consequences for major firms like Samsung and SK Hynix, which operate within China, South Korea’s largest trading partner.
At the same time, the Biden administration is contemplating the application of an export control known as the foreign direct product rule against allies that continue exporting chipmaking tools and equipment to China. This regulation would prevent the export of any goods manufactured with a specified percentage of U.S. intellectual property components to any country.