South Korea is experiencing a unique productivity increase attributed to artificial intelligence, but ongoing tensions between the U.S. and China over semiconductor issues could pose risks to this growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as the leading beneficiary of the AI revolution, witnessing an export surge of over 50% year-on-year, as detailed in a Global Research report by Bank of America. In the long run, the analysts predict that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its status in AI integration.
However, the analysts cautioned that potential geopolitical conflicts could negatively impact the semiconductor supply chain, particularly in light of rising U.S.-China tensions, presenting a potential hurdle for AI advancement in South Korea. Despite diversifying its chip exports beyond China, over 30% of South Korea’s chip exports still went to China and Hong Kong in 2023, which is comparable to exports to the U.S.
They noted, “If geopolitical tensions escalate and the U.S. imposes more trade restrictions on AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor export market.”
Furthermore, South Korean chip producers rely on China for specific chipmaking components and tools. Any disruption in this supply chain due to rising tensions could hinder South Korean companies’ access to essential production equipment.
The U.S. has reportedly urged South Korea to limit exports of equipment and technology used for manufacturing memory and advanced logic chips to China, specifying restrictions on chips with advanced logic beyond 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly evaluating the U.S. request, given the potential impact on significant domestic companies like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is considering implementing export controls, specifically the foreign direct product rule, on allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods produced with a certain level of U.S. intellectual property to any country.