South Korea is experiencing one of the few productivity boosts from artificial intelligence globally, although rising tensions between the U.S. and China regarding semiconductors could pose challenges to this growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports. A recent report from Bank of America Global Research highlights that the country has capitalized on the AI surge, with semiconductor exports increasing by over 50% year-over-year. Analysts believe that South Korea’s substantial investment in AI research and development, coupled with a rising number of AI-related patents, positions the nation favorably for future AI adoption.
However, the report warns that potential geopolitical tensions, especially between the United States and China, may impact the semiconductor supply chain and thus hinder AI growth in South Korea. Although the country has begun diversifying its chip exports beyond China, over 30% of its semiconductor exports in 2023 still went to China and Hong Kong, with a similar proportion sent to the U.S.
Bank of America analysts expressed concern that if geopolitical tensions escalate and the U.S. enforces stricter trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory chip exports.
Additionally, South Korean semiconductor manufacturers rely on China for certain chipmaking components and equipment. Disruption in this supply chain due to rising tensions could make it challenging for these companies to acquire the necessary tools for chip production.
The U.S. government has reportedly urged South Korea to limit exports of equipment and technology used in manufacturing memory chips and advanced logic chips, particularly those that are more advanced than 14-nanometer logic chips and 18-nanometer DRAM memory chips. South Korean officials are reportedly considering this request, given the potential impact on major local corporations like Samsung and SK Hynix that operate in China, South Korea’s largest trading partner.
Concurrently, the Biden administration is said to be contemplating the use of export controls, specifically the Foreign Direct Product Rule, on allies that continue to sell chipmaking tools and equipment to China. This rule prohibits the export of any goods to any nation if they are produced using a certain percentage of U.S. intellectual property components.