South Korea is experiencing a unique productivity increase driven by artificial intelligence, but ongoing tensions between the U.S. and China regarding semiconductor technology could hinder its growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, with the nation being the largest beneficiary of the AI surge, as exports have witnessed over a 50% year-over-year increase. The analysts expressed optimism about South Korea’s significant investments in AI research and development, along with its upward trend in AI-related patents, which are likely to enhance its role in AI adoption in the long run.
Nevertheless, the analysts cautioned that geopolitical tensions could negatively impact the semiconductor supply chain, particularly amidst escalating conflicts between the U.S. and China. Though South Korea has been diversifying its chip exports away from China and toward other regions, over 30% of its chip exports in 2023 were directed to China and Hong Kong, with a similar portion going to the United States.
In the event of heightened geopolitical strife, analysts warned that U.S. trade restrictions on advanced or AI-related chip exports to China could severely affect South Korea’s memory semiconductor exports. Furthermore, South Korean chip manufacturers rely on China for certain components and equipment pivotal to chip production. Disruptions in the supply chain could complicate access to necessary production tools for these firms.
Reports indicate that the U.S. has requested South Korea to limit exports to China involving equipment and technology used for manufacturing memory and advanced logic chips, specifically those surpassing 14-nanometer in logic advancements and 18-nanometer in DRAM memory. South Korean officials are reportedly contemplating the U.S. request due to potential repercussions for major domestic companies like Samsung and SK Hynix, which have significant operational ties in China.
Additionally, the Biden administration is mulling over the implementation of an export control policy known as the foreign direct product rule, targeting allies that continue to provide chip-making tools and equipment to China. This rule would prevent the export of any goods to any country if they are manufactured using a specified percentage of U.S. intellectual property.