South Korea stands out as one of the few economies worldwide experiencing productivity gains from artificial intelligence, though analysts from Bank of America warn that U.S.-China tensions regarding semiconductor chips may hinder this growth.
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According to a Bank of America Global Research report, the semiconductor sector constitutes 17% of South Korea’s exports and the nation has emerged as a major beneficiary of the AI surge, evidenced by a more than 50% year-over-year increase in exports. Analysts predict that South Korea’s substantial investment in AI research and development, along with a rise in AI-related patents, will solidify its advancements in AI implementation in the long run.
However, the report cautions that rising geopolitical tensions could strain the semiconductor supply chain, particularly the escalating friction between the U.S. and China, which poses a threat to AI advancements in South Korea. Although South Korea has redirected chip exports away from China to other regions, more than 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being roughly equivalent.
Bank of America analysts highlighted that if geopolitical tensions escalate and the U.S. enforces stricter trade limitations on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip producers rely on China for certain components and equipment needed for chip manufacturing. Any disruptions in the supply chain caused by these tensions would complicate the acquisition of essential production tools for South Korean companies.
Reports indicate that the U.S. has requested South Korea to limit exports to China of machinery and technology used in the production of memory and advanced logic chips, particularly those with specifications exceeding 14-nanometers for logic chips and 18-nanometers for DRAM memory chips. South Korean officials are reportedly considering the U.S. request due to potential impacts on major domestic firms like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
Meanwhile, the Biden administration is reportedly contemplating the application of an export control known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools to China. This rule would restrict exports of any product manufactured with a specified percentage of U.S. intellectual property to other countries.