South Korea is experiencing notable gains in productivity driven by artificial intelligence, as highlighted by analysts at Bank of America. However, they caution that ongoing tensions between the U.S. and China concerning semiconductor technology could pose significant challenges to the country’s growth.
The semiconductor sector is crucial for South Korea, accounting for 17% of its exports. A recent report from Bank of America Global Research indicates that South Korea has emerged as the foremost beneficiary of the AI surge, with semiconductor exports soaring over 50% year-over-year. Analysts believe that the country’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will strengthen its position in AI adoption in the long run.
Despite these positive developments, analysts express concern that geopolitical tensions might impact the semiconductor supply chain, particularly the escalating discord between the U.S. and China. Although South Korea has diversified its chip exports beyond China, over 30% of its chip exports were still directed to China and Hong Kong in 2023, with a similar percentage going to the U.S.
Bank of America analysts warn that if geopolitical tensions worsen and the U.S. enacts more trade restrictions on advanced or AI-related chip exports to China, it could severely impact Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for various components and equipment needed for chip production. Disruptions in this supply chain due to rising tensions would hinder these manufacturers’ ability to secure the necessary tools for chip fabrication.
The U.S. has reportedly requested South Korea to limit exports of specific chip manufacturing equipment and technology to China. This includes restrictions on memory chips and advanced logic chips that are more sophisticated than 14-nanometer and 18-nanometer processes, respectively. South Korean officials are contemplating the ramifications of this request on major local companies such as Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Additionally, the Biden administration is said to be considering implementing an export control known as the foreign direct product rule against allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit exporting products to any country if they are manufactured using a certain percentage of U.S. intellectual property.