South Korea is experiencing a notable increase in productivity fueled by artificial intelligence, although rising tensions between the U.S. and China concerning semiconductors could hinder its growth, according to analysts from Bank of America.
The semiconductor sector is crucial for South Korea, constituting 17% of its exports. A recent report from Bank of America Global Research highlights that the country has emerged as a primary recipient of the AI surge, with exports rising over 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will bolster its role in AI adoption in the future.
However, the report warns that escalating geopolitical tensions could impact the semiconductor supply chain, particularly the ongoing friction between the U.S. and China, which poses a threat to AI growth in South Korea. Despite diversifying chip exports beyond 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.
Bank of America analysts cautioned that new U.S. trade restrictions on advanced or AI-related chip exports to China could severely affect South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for various components and equipment, making any supply chain disruptions more challenging for production.
Reports indicate that the U.S. has requested South Korea to place restrictions on exporting to China equipment and technology used in manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean authorities are reportedly considering this request due to potential impacts on major South Korean companies such as Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In a related development, the Biden administration is contemplating the application of an export control measure called 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 products to any country if they are manufactured using a specific percentage of U.S. intellectual property components.