South Korea is experiencing one of the few productivity enhancements globally due to artificial intelligence, according to analysts at Bank of America. However, escalating tensions between the U.S. and China concerning semiconductor technology may pose challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as the leading beneficiary of the AI boom, with exports increasing by over 50% year-over-year, as noted in a report from Bank of America Global Research. Analysts project that South Korea’s significant investments in AI research and its increasing number of AI-related patents will further enhance its position in AI adoption in the long run.
Nonetheless, the analysts caution that rising geopolitical tensions could impact the semiconductor supply chain, particularly with the ongoing friction between the U.S. and China, which may hinder AI-related growth in South Korea. Although the country has worked to diversify its chip exports beyond China, more than 30% of its semiconductor exports in 2023 still went to China and Hong Kong, with a similar portion directed to the U.S.
Bank of America analysts expressed concerns that if tensions escalate and the U.S. imposes stricter trade restrictions on the export of advanced or AI-related chips to China, it could severely impact memory semiconductor exports from South Korea.
Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. If geopolitical tensions disrupt the supply chain, it could complicate the ability of South Korean companies to acquire the necessary tools for chip production.
The U.S. has reportedly requested South Korea to limit exports to China regarding equipment and technology essential 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 considering this request, mindful of potential impacts on major firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In related developments, the Biden administration is reportedly contemplating invoking an export control known as the foreign direct product rule against allies that continue to supply China with chipmaking tools and equipment. This rule would prevent the export of any product manufactured with a certain percentage of U.S. intellectual property components to any country.