South Korea is experiencing a notable increase in productivity driven by artificial intelligence, but growth may be hindered by rising U.S.-China tensions regarding semiconductors, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a key beneficiary of the AI surge, with exports rising over 50% compared to the previous year, as cited in a report by Bank of America Global Research. Analysts anticipate that South Korea’s significant investment in AI research and development and an expanding portfolio of AI-related patents will strengthen its role in AI adoption over time.
However, analysts caution that potential geopolitical tensions might impact the semiconductor supply chain, particularly amid escalating U.S.-China conflicts, which could pose challenges to South Korea’s AI growth. Despite efforts to diversify chip exports away from China, the combined total of exports to China and Hong Kong exceeded 30% in 2023, which parallels exports to the U.S.
Bank of America analysts warned that if geopolitical tensions worsen and the United States enforces additional trade restrictions on advanced or AI-related chip exports to China, South Korea’s memory semiconductor exports could face significant setbacks.
South Korean chip producers also rely on China for certain essential components and equipment necessary for chip manufacturing. Disruptions in these supply chains due to rising tensions could complicate the ability of South Korean companies to procure the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly deliberating on the U.S. request, considering 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 reportedly contemplating the implementation of an export control known as the foreign direct product rule against allies that continue supplying chipmaking tools to China. This regulation would prohibit the export of any product to any country if it is manufactured using a specified percentage of U.S. intellectual property.