South Korea is experiencing a unique increase in productivity driven by artificial intelligence, but potential challenges loom due to escalating U.S.-China tensions over semiconductors, according to analysts from Bank of America.
The semiconductor sector is pivotal for South Korea, contributing to 17% of its exports. A recent report from Bank of America Global Research highlights that the country has significantly benefited from the AI boom, with exports rising by more than 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its standing in AI adoption over time.
However, the report cautions that geopolitical tensions could disrupt the semiconductor supply chain, particularly due to increasing friction between the U.S. and China. Although South Korea has diversified its chip exports beyond China, over 30% of its semiconductor exports in 2023 were still directed to China and Hong Kong, with a similar percentage going to the U.S.
Bank of America analysts warned that if geopolitical tensions escalate and the U.S. enacts further trade restrictions on advanced or AI-related chip exports to China, it could significantly impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip producers rely on China for essential components and manufacturing equipment. Any disruptions in the supply chain due to geopolitical tensions could hinder these firms’ ability to acquire the necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used in manufacturing memory chips and advanced logic chips, particularly those exceeding the 14-nanometer and 18-nanometer specifications. South Korean officials are considering this request, weighing the potential impacts on major local companies like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is reportedly evaluating the implementation of an export control tool called the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule restricts the export of any goods that include a certain percentage of U.S. intellectual property components.