According to analysts at Bank of America, South Korea is experiencing a unique productivity surge driven by artificial intelligence, but rising tensions between the U.S. and China regarding semiconductor technology could pose significant challenges to its growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and reports indicate that the nation has greatly benefitted from the AI boom, with exports increasing by over 50% year-over-year. Bank of America’s Global Research report highlights that South Korea’s substantial investments in AI research and development, along with a growing portfolio of AI-related patents, are likely to solidify its standing in AI implementation.
Nonetheless, the analysts warn that escalating geopolitical conflicts could impact the semiconductor supply chain, particularly due to ongoing hostilities between the U.S. and China. Despite efforts to diversify chip exports beyond China, the report notes that more than 30% of South Korea’s chip exports were directed to China and Hong Kong in 2023, with a similar proportion going to the U.S.
The report cautions that if tensions worsen and the U.S. enacts further trade restrictions on the export of advanced or AI-related chips to China, it could substantially harm South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for specific components and equipment necessary for chip production. A disruption in the supply chain caused by rising tensions could hinder the ability of these firms to acquire essential production tools.
Reports suggest that the U.S. has urged South Korea to impose restrictions on the export of equipment and technology utilized in the manufacture of memory and advanced logic chips to China, particularly targeting chips more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering these requests, weighing the potential implications for major corporate players such as Samsung and SK Hynix, both of which have substantial operations in China.
Additionally, the Biden administration is said to be contemplating the implementation of an export control known as the foreign direct product rule, aimed at allies that continue to sell semiconductor manufacturing tools to China. This rule would prevent the export of any product to any country if it is produced with a certain threshold of U.S. intellectual property.