South Korea stands out as one of the few economies globally experiencing a productivity increase attributed to artificial intelligence, but analysts from Bank of America caution that rising U.S.-China tensions over semiconductors may hinder this growth.
The semiconductor sector represents a significant 17% of South Korea’s exports, and it has emerged as a top beneficiary of the AI surge, with exports rising more than 50% year-over-year, according to a report from Bank of America Global Research. Analysts believe South Korea’s substantial investment in AI research and development, along with a growing volume of AI-related patents, will enhance its role in AI adoption in the long run.
However, analysts warn that geopolitical tensions could impact the semiconductor supply chain, particularly concerning the escalating friction between the U.S. and China, which might pose challenges to AI’s advancement in South Korea. Despite the country diversifying its chip exports beyond China to other regions, over 30% of its semiconductor exports were directed to China and Hong Kong in 2023, with exports to the U.S. at a similar level.
Bank of America analysts indicated that should geopolitical tensions escalate and the U.S. impose further trade restrictions on the export of advanced or AI-related chips to China, it could significantly affect South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for several components and equipment essential for chip production. Hence, any disruption due to rising tensions could complicate access to the necessary tools for manufacturing chips.
Reports suggest that the U.S. has urged South Korea to limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request, recognizing the potential impact on major domestic companies like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the use of an export control measure known as the foreign direct product rule targeting allies that continue to sell semiconductor manufacturing tools and equipment to China. This rule would prohibit the export of any goods if they are produced with a specific percentage of U.S. intellectual property content.