South Korea is experiencing a notable productivity increase spurred by artificial intelligence, yet analysts from Bank of America caution that rising tensions between the U.S. and China regarding semiconductor chips could hinder its growth.
According to a Bank of America Global Research report, the semiconductor sector constitutes 17% of South Korea’s exports, making the nation a significant beneficiary of the AI boom, with exports rising over 50% year-over-year. The report highlights that South Korea’s substantial investment in AI research and development, along with an increasing volume of AI-related patents, positions it favorably for future advancements in AI adoption.
However, the analysts express concerns that ongoing geopolitical tensions, particularly between the U.S. and China, could negatively impact the semiconductor supply chain. Even though South Korea has diversified its chip exports beyond China to other regions, over 30% of its semiconductor exports still went to China and Hong Kong in 2023. Exports to the U.S. were similar in scale.
The analysts warn that if geopolitical conflicts escalate and the U.S. imposes further trade restrictions on the export of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruptions in the supply chain due to geopolitical tensions could complicate access to necessary production tools for these companies.
Reports indicate that the U.S. has requested that South Korea limit exports to China of technologies and equipment used to manufacture memory chips and advanced logic chips, particularly those exceeding 14-nanometers in technology and 18-nanometer for DRAM chips. South Korean officials are reportedly evaluating this request, considering the potential impact on major domestic firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In the backdrop, the Biden administration is reportedly contemplating the implementation of an export control mechanism known as the foreign direct product rule, targeting allies that persist in providing chipmaking tools to China. This regulation would prevent the export of any goods to any country if they are produced with a specified percentage of U.S. intellectual property.