South Korea is experiencing a notable productivity increase attributed to artificial intelligence, according to analysts from Bank of America. However, escalating tensions between the United States and China surrounding semiconductor policies could potentially impede this growth.
The semiconductor sector constitutes 17% of South Korea’s total exports, with the nation reaping significant benefits from the AI surge, witnessing over a 50% increase in exports year-on-year, as per a report by Bank of America Global Research. Analysts maintain that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, are expected to enhance its role in AI adoption in the long run.
Nonetheless, analysts caution that geopolitical conflicts, especially between the U.S. and China, could impact the semiconductor supply chain, presenting obstacles for South Korea’s AI advancement. Although South Korea has diversified its chip exports to other regions, over 30% of its chip exports still went to China and Hong Kong in 2023, with a similar proportion directed to the U.S.
Bank of America experts warn that if U.S.-China tensions intensify, leading to renewed trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for critical components and equipment necessary for chip production. Disruptions in this supply chain caused by geopolitical tensions could hinder South Korean companies’ ability to obtain the essential tools for chip manufacturing.
The U.S. has reportedly urged South Korea to limit exports to China of technologies and equipment used in the production of memory and advanced logic chips, particularly those chips more sophisticated than 14-nanometer and DRAM memory exceeding 18-nanometer specifications. South Korean officials are currently assessing the implications of this request, given potential impacts on major domestic firms like Samsung and SK Hynix that operate in China, South Korea’s primary trading partner.
In addition, the Biden administration is contemplating invoking an export control mechanism known as the foreign direct product rule against allies that continue to supply chipmaking equipment and tools to China. This rule prohibits the exportation of any goods produced with a specified percentage of U.S. intellectual property to any country.