South Korea is experiencing a notable boost in productivity due to artificial intelligence, according to analysts from Bank of America. However, they caution that rising tensions between the U.S. and China over semiconductor technology could pose challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a major beneficiary of the AI boom, with exports increasing by over 50% year-over-year. Analysts believe that South Korea’s significant investment in AI research and development, along with an increasing number of AI-related patents, will strengthen its position in AI adoption over the long term.
Despite these positive developments, analysts warn that escalating geopolitical tensions could impact the semiconductor supply chain. South Korea has made efforts to diversify its chip exports away from China; however, in 2023, China and Hong Kong still accounted for over 30% of its chip exports, with a similar percentage going to the U.S.
Should geopolitical issues escalate and the U.S. implement further trade restrictions on advanced or AI-related chip exports to China, this could severely impact Korea’s memory semiconductor exports, analysts noted.
Additionally, South Korean chip manufacturers rely on China for crucial chipmaking components and equipment. Any disruption in these supply chains caused by heightened tensions would hinder South Korean companies’ ability to acquire the necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, particularly those surpassing 14-nanometer specifications and DRAM memory chips exceeding 18-nanometer. South Korean authorities are contemplating this request, considering the potential impact on major firms like Samsung and SK Hynix, which have operations in China, their largest trading partner.
In response to these dynamics, the Biden administration is contemplating the application of an export control known as the foreign direct product rule, aimed at allies that continue to supply chipmaking tools and equipment to China. This rule would restrict the export of any product to any nation if it is produced using a specific percentage of U.S. intellectual property.