South Korea is experiencing a productivity increase driven by artificial intelligence, according to analysts at Bank of America. However, they caution that rising tensions between the U.S. and China regarding semiconductor technology may pose challenges for the country’s continued growth in this sector.
The semiconductor industry represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI sector, with exports rising more than 50% year-over-year, as noted in a report by Bank of America Global Research. Analysts believe that the substantial investment Korea has made in AI research and development, along with an increasing number of AI-related patents, will bolster its position in AI implementation over the long run.
Despite this positive outlook, there are concerns regarding potential geopolitical unrest impacting the semiconductor supply chain, particularly due to the escalating tensions between the U.S. and China. While South Korea has been successful in diversifying its chip exports away from China, over 30% of its chip 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. imposes stricter trade restrictions on the export of advanced or AI-related chips to China, it could significantly harm South Korea’s memory semiconductor exports.
In addition, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Should geopolitical tensions disrupt this supply chain, South Korean companies may face difficulties obtaining the tools required for manufacturing chips.
The U.S. has reportedly requested that South Korea limit its exports to China of equipment and technology utilized in the production of memory chips and advanced logic chips, especially those more advanced than 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are said to be considering the U.S. request due to potential impacts on major firms such as Samsung and SK Hynix that operate in China, which remains their largest trading partner.
Additionally, the Biden administration is reportedly contemplating the implementation of an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This regulation prohibits the export of any product to any nation if it contains a certain percentage of U.S. intellectual property components.