South Korea is experiencing a unique productivity increase attributed to the rise of artificial intelligence, according to analysts from Bank of America. However, they caution that escalating U.S.-China tensions regarding semiconductor technology could pose risks to the nation’s growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a major beneficiary of the AI surge, with exports rising over 50% year-on-year as reported by Bank of America Global Research. Analysts believe that South Korea’s substantial investments in AI research, along with a growing number of AI-related patents, will bolster its adoption of AI technologies in the long run.
Despite this positive outlook, analysts warned that geopolitical conflicts could impact the semiconductor supply chain, particularly given the current tensions between the U.S. and China. While South Korea has begun diversifying its chip exports away from China towards other regions, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar percentage directed to the U.S.
The analysts asserted that if geopolitical tensions escalate and the U.S. implements further trade restrictions on the export of advanced or AI-related chips to China, it could significantly hurt South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers are reliant on Chinese sources for certain components and equipment needed for chip production. Therefore, any disruptions in the supply chain due to increased tensions could complicate the ability of South Korean companies to obtain the necessary tools for semiconductor manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory and advanced logic chips, specifically targeting chips more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are currently contemplating the U.S. request, considering potential impacts on significant domestic firms like Samsung and SK Hynix, which have operations in China, its largest trading partner.
Moreover, the Biden administration is reportedly considering implementing an export control mechanism known as the foreign direct product rule, aimed at allies that continue to provide chip-making tools and equipment to China. This rule would prevent the export of any product to any country if it contains a certain percentage of U.S.-made intellectual property components.