South Korea is experiencing a notable productivity increase due to artificial intelligence, according to analysts at Bank of America. However, tensions between the United States and China related to semiconductor chips could pose a threat to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and a recent report from Bank of America Global Research highlights that the country has gained significantly from the AI surge, with exports rising by over 50% year-on-year. Analysts suggest that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, is set to bolster its leadership in AI adoption in the future.
However, potential geopolitical issues, particularly the ongoing conflicts between the U.S. and China, might impact the stability of the semiconductor supply chain, which is critical for South Korea’s growth in AI. Despite efforts to diversify its chip exports beyond China, over 30% of South Korea’s chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. at similar levels.
Bank of America analysts warn that if U.S.-China tensions escalate and the U.S. imposes 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 manufacturers rely on China for various chipmaking components and equipment. Disruptions in this supply chain would complicate production efforts for these manufacturers.
Reports indicate that the U.S. has requested South Korea to limit exports of chipmaking equipment and technology to China, particularly for memory chips more advanced than 18-nanometer and logic chips exceeding 14-nanometer technology. South Korean officials are reportedly considering this request, mindful of the potential impact on major domestic firms like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
At the same time, the Biden administration is said to be contemplating the use of an export control mechanism, known as the foreign direct product rule, against nations that continue to supply chipmaking tools and equipment to China. This rule would restrict the export of any product to any country if it includes a specific percentage of U.S. intellectual property components in its manufacturing.