South Korea is experiencing a significant productivity increase due to artificial intelligence, a trend that could be jeopardized by escalating U.S.-China tensions regarding semiconductor technology, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation is reportedly benefiting greatly from the AI surge, with exports rising more than 50% year-over-year. Bank of America Global Research details that South Korea’s substantial investments in AI research and development, along with a growing number of AI-related patents, should enhance its position in AI adoption in the long run.
However, the analysts caution that geopolitical tensions could impact the semiconductor supply chain, particularly as relations between the U.S. and China become strained. Despite diversifying its chip exports, South Korea still relies heavily on China and Hong Kong, which together accounted for over 30% of its chip exports in 2023. Exports to the U.S. were nearly on par.
Bank of America warned that if U.S.-China tensions escalate and America imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
South Korean manufacturers also source essential components and equipment from China for chip production. Thus, any disruptions in supply chains due to geopolitical issues could hinder South Korean companies’ ability to obtain necessary manufacturing tools.
The U.S. has reportedly requested that South Korea limit exports of equipment and technology used in the production of advanced memory chips and logic chips, specifically targeting chips more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating this request, considering the potential consequences for major domestic corporations like Samsung and SK Hynix, both of which have significant operations in China, the country’s largest trading partner.
In addition, the Biden administration is reportedly looking into applying an export control measure known as the foreign direct product rule to allies that continue supplying chipmaking tools to China. This rule prevents the export of any good to any country if it is produced with a specific percentage of U.S. intellectual property.