South Korea stands out as one of the few nations benefiting from a productivity increase driven by artificial intelligence; however, analysts from Bank of America warn that escalating U.S.-China tensions regarding semiconductors could hinder this growth.
The semiconductor sector is crucial for South Korea, constituting 17% of its exports. A recent report from Bank of America Global Research indicates that the country has reaped significant benefits from the AI surge, with exports rising over 50% year-on-year. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will enhance its adoption of AI technologies in the long term.
Nonetheless, the report highlights that geopolitical uncertainties might disrupt the semiconductor supply chain, particularly due to rising tensions between the U.S. and China. While South Korea has worked to diversify its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being comparable.
The analysts caution that if U.S.-China tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could significantly affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Any disruption to this supply chain could create challenges for South Korean companies in securing the necessary tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology essential for producing memory chips and advanced logic chips, specifically those chips that exceed 14-nanometer and DRAM memory chips greater than 18-nanometer. South Korean authorities are reportedly evaluating this request, considering potential implications for major domestic firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Meanwhile, the Biden administration is contemplating the implementation of an export control strategy known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any product to any nation if it contains a certain percentage of U.S. intellectual property components.