South Korea is experiencing a unique boost in productivity attributed to artificial intelligence, but the rising tensions between the U.S. and China over semiconductor trade pose a potential threat to this growth, according to analysts at Bank of America.
The semiconductor sector is crucial for South Korea, making up 17% of its exports, and the nation has emerged as a primary beneficiary of the AI boom, with semiconductor exports soaring over 50% year-on-year, as reported by Bank of America Global Research. Analysts anticipate that South Korea’s significant investments in AI research and its increasing number of AI-related patents will bolster its leadership in AI adoption in the long run.
However, the analysts caution that escalating geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain and impede AI growth in South Korea. Although the country has made strides in diversifying its chip exports to markets beyond China, the latter, along with Hong Kong, accounted for over 30% of South Korea’s chip exports in 2023, and exports to the U.S. were similarly significant.
If tensions worsen and the U.S. tightens trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korean memory semiconductor exports, the analysts warned.
Additionally, South Korean chip manufacturers rely on China for key components and equipment essential for chip production. Disruptions in this supply chain due to geopolitical conflicts could hinder their ability to obtain the necessary tools and materials.
The U.S. has reportedly requested that South Korea limit exports of semiconductor manufacturing equipment and technology to China, specifically targeting logic chips that are more advanced than 14-nanometer and DRAM memory chips above 18-nanometer. South Korean officials are reportedly considering this request, weighing the potential impact on major domestic companies like Samsung and SK Hynix, which have substantial operations in China, South Korea’s largest trading partner.
In a related development, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule against allies that continue to supply chip-making tools and equipment to China. This rule would prevent any goods from being exported to any nation if they contain a certain percentage of U.S. intellectual property components.