South Korea is experiencing a notable productivity boost due to artificial intelligence, but challenges may arise from escalating U.S.-China tensions over semiconductor supplies, analysts at Bank of America have noted.
According to a Bank of America Global Research report, the semiconductor sector constitutes 17% of South Korea’s exports, making the nation a significant beneficiary of the AI boom, with exports increasing over 50% year-over-year. The report suggests that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will enhance the country’s standing in AI adoption in the long run.
However, analysts caution that geopolitical tensions, particularly between the U.S. and China, may impact the semiconductor supply chain, posing a challenge to AI growth in South Korea. Despite efforts to diversify chip exports away from China, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with a similar percentage going to the U.S.
If U.S. tensions with China escalate and additional trade restrictions are implemented on advanced or AI-related chip exports, it could significantly affect South Korea’s memory semiconductor exports, the analysts warned.
South Korean chip manufacturers also rely on China for certain components and equipment necessary for chip production. Disruptions due to geopolitical tensions could complicate access to these essential tools.
The U.S. is reportedly urging South Korea to limit exports to China of technologies and equipment for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly considering this request due to potential impacts on major local firms, including Samsung and SK Hynix, that conduct business in China, South Korea’s largest trading partner.
Simultaneously, the Biden administration is contemplating invoking an export control measure known as the foreign direct product rule against allies that continue to provide chipmaking tools and equipment to China. This regulation prevents the export of any goods to any nation if they are produced using a specified percentage of U.S. intellectual property components.