South Korea is experiencing a productivity increase driven by artificial intelligence, according to analysts from Bank of America. However, they warn that ongoing tensions between the U.S. and China regarding semiconductor technology could hinder the nation’s growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a leading beneficiary of the AI surge, with exports rising more than 50% year-over-year, as noted in a recent Bank of America Global Research report. Analysts believe that South Korea’s significant investment in AI research and development, coupled with a rising number of AI-related patents, will bolster its position in AI adoption in the future.
Nonetheless, potential geopolitical conflicts could impact the semiconductor supply chain. The increasing friction between the U.S. and China is particularly concerning for South Korea’s AI development. Although South Korea has been working to diversify its chip exports from China to other regions, the report indicates that China and Hong Kong accounted for over 30% of its chip exports in 2023, with approximately the same percentage going to the U.S.
Bank of America analysts cautioned that if geopolitical tensions escalate and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip producers rely on China for various chipmaking components and equipment. Any disruption in this supply chain could complicate access to essential tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technologies used for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM chips exceeding 18-nanometers. South Korean officials are reportedly deliberating over this request, considering potential consequences for major domestic firms like Samsung and SK Hynix, which have operations in China—their largest trading partner.
Concurrently, the Biden administration is contemplating employing an export control mechanism known as the foreign direct product rule against allies that continue to supply chipmaking equipment and tools to China. This rule would prohibit the export of any good to any nation if it is produced using a specified percentage of U.S. intellectual property components.