South Korea is experiencing a surge in productivity driven by artificial intelligence, despite potential challenges posed by escalating U.S.-China tensions, according to analysts at Bank of America.
The semiconductor sector, which constitutes 17% of South Korea’s exports, has seen a remarkable 50% increase in exports year-over-year, making the country a significant beneficiary of the ongoing AI boom. Analysts project that South Korea’s substantial investment in AI research and development, coupled with a rising number of AI-related patents, will bolster its progress in AI adoption.
However, geopolitical tensions could disrupt the semiconductor supply chain, particularly due to the strained relationship between the U.S. and China. While South Korea has diversified its chip exports away from China, over 30% of its chip exports still went to China and Hong Kong in 2023, with a similar portion directed to the U.S.
Bank of America analysts warned that further escalation in U.S.-China tensions could lead to additional trade restrictions on advanced chip exports to China, which would heavily impact South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for essential chipmaking components and equipment. Thus, any disruptions could impede their ability to produce chips effectively.
The U.S. has asked South Korea to limit exports to China of equipment and technology essential for manufacturing advanced memory chips and logic chips, particularly those exceeding 14-nanometer and 18-nanometer specifications. South Korean officials are contemplating this request due to its potential ramifications on significant domestic companies like Samsung and SK Hynix, which have extensive operations in China.
Additionally, the Biden administration is reportedly considering applying an export control measure known as the foreign direct product rule on allies that continue selling chipmaking technologies to China. This rule prohibits the export of any product to any country if it is produced using a specific percentage of U.S. intellectual property components.