South Korea is experiencing a unique productivity boost from artificial intelligence, but potential geopolitical tensions related to U.S.-China relations, particularly over semiconductors, could threaten its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has significantly benefited from the AI surge, with exports increasing by over 50% year-over-year. Bank of America Global Research suggests that South Korea’s substantial investments in AI research and development, along with a rise in AI-related patents, could enhance its position in AI adoption further in the long term.
However, analysts warn that geopolitical issues might impact the semiconductor supply chain, particularly the escalating tensions between the U.S. and China. While South Korea has made efforts to diversify its chip exports beyond China, more than 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being roughly similar.
The report highlights concerns that if U.S.-China tensions worsen and additional trade restrictions on advanced or AI-related chip exports to China are imposed, it could substantially harm South Korea’s memory semiconductor exports. Additionally, South Korean chip producers rely on China for essential components and equipment for chip manufacturing, making supply chain disruptions a potential obstacle for production capabilities.
The U.S. has reportedlyrequested South Korea to limit exports to China of equipment and technology used in the production of memory and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating the U.S. request due to possible impacts on major South Korean companies, including Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Furthermore, the Biden administration is said to be considering the application of an export control measure known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This rule prevents the export of any goods to any country if they contain a certain percentage of U.S. intellectual property.