South Korea is experiencing a rare productivity increase attributed to artificial intelligence, according to Bank of America analysts, but rising U.S.-China tensions over semiconductor technology may pose challenges to this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a leading beneficiary of the AI surge, with exports rising by over 50% year-over-year, as noted in a recent Global Research report from Bank of America. Analysts anticipate that sustained investment in AI research and development, along with an increasing number of AI-related patents, will enhance South Korea’s capacity for AI adoption in the future.
However, the analysts warned that escalating geopolitical tensions could impact the semiconductor supply chain, particularly due to the strained relations between the U.S. and China. Despite diversifying chip exports away from China, over 30% of South Korea’s chip exports were still directed to China and Hong Kong in 2023, with a similar share going to the U.S.
The report emphasized that a significant escalation in tensions leading to additional U.S. trade restrictions on advanced or AI-related chip exports to China could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chipmakers rely on China for certain components and equipment necessary for chip production. Disruption in the supply chain due to geopolitical tensions could complicate access for South Korean companies to the essential tools required for manufacturing chips.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technologies used in producing memory chips and advanced logic chips that exceed 14-nanometer specifications and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly evaluating this request, considering the potential impact on major companies such as Samsung and SK Hynix, both of which operate in China, South Korea’s largest trading partner.
Additionally, the Biden administration is said to be contemplating the application of export controls known as the foreign direct product rule on allies that persist in supplying chipmaking tools and equipment to China. This regulation would prohibit the export of any commodity to any nation if it is produced with a specific percentage of U.S. intellectual property.