South Korea is experiencing a notable productivity increase driven by artificial intelligence, according to analysts from Bank of America. However, they caution that escalating tensions between the U.S. and China concerning semiconductor technology could pose risks to the country’s growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a key player in the AI boom, with exports surging by over 50% year-over-year. Analysts from the report highlight South Korea’s significant investment in AI research and development, along with a growing portfolio of AI-related patents, which they believe will bolster the country’s position in AI adoption in the long run.
Nevertheless, potential geopolitical strains, particularly the ongoing U.S.-China rivalry, could impact the semiconductor supply chain. Despite diversifying chip exports to other parts of Asia, China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. making up a similar proportion.
Bank of America analysts warn that if geopolitical tensions escalate and the U.S. imposes stricter trade restrictions on advanced semiconductor exports to China, it could have a detrimental effect on South Korea’s memory chip exports.
Moreover, South Korean chip manufacturers rely on China for certain essential components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could hinder South Korean companies’ ability to acquire the tools necessary for manufacturing chips.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology for producing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering the U.S. request carefully, as it could have significant implications for major South Korean firms like Samsung and SK Hynix, which maintain operations in China, its largest trading partner.
Additionally, the Biden administration is rumored to be contemplating the implementation of an export control known as the foreign direct product rule. This regulation would restrict the export of goods manufactured with a specified percentage of U.S. intellectual property to countries that continue to sell chipmaking tools and equipment to China.