South Korea is witnessing a notable increase in productivity fueled by artificial intelligence, according to analysts from Bank of America. However, rising tensions between the U.S. and China regarding semiconductor technology may present challenges to this growth.
The semiconductor sector plays a significant role in South Korea’s economy, accounting for 17% of its exports. Bank of America Global Research indicates that South Korea has emerged as a leading recipient of the AI boom, experiencing over a 50% rise in exports year-over-year. In the long run, analysts believe that the country’s substantial investment in AI research and development, alongside a growing number of AI-related patents, will enhance its position in AI adoption.
Nonetheless, analysts warn that geopolitical tensions could impact the semiconductor supply chain, particularly due to escalating conflicts between the U.S. and China. Although South Korea has made efforts to diversify its chip exports beyond China to other regions, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar proportion directed to the U.S.
Bank of America analysts cautioned that if geopolitical tensions worsen and the U.S. enforces additional trade restrictions on advanced or AI-linked chip exports to China, it could severely disrupt South Korea’s memory semiconductor exports.
Furthermore, South Korean chip producers rely on China for crucial chipmaking components and equipment, meaning that supply chain disruptions could hinder their ability to manufacture chips.
Reports suggest that the U.S. has requested South Korea to limit exports to China of vital equipment and technology used in producing memory chips and advanced logic chips, specifically focusing on logic chips more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, keeping in mind the potential impacts on key South Korean companies, such as Samsung and SK Hynix, which operate within China, its largest trading partner.
In addition, the Biden administration is contemplating implementing an export control known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods to any country if they are produced using a specific percentage of U.S. intellectual property components.