South Korea is experiencing a notable productivity increase due to artificial intelligence, standing out among global economies. However, analysts from Bank of America warn that escalating tensions between the U.S. and China over semiconductor issues could hamper this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and recent findings from a Bank of America Global Research report indicate that the nation is reaping substantial benefits from the AI surge, with exports rising over 50% year-over-year. In the long term, the report suggests that South Korea’s significant investments in AI research and development, along with a growing portfolio of AI-related patents, will enhance its leadership in AI implementation.
Nevertheless, analysts express concern that geopolitical strains could impact the semiconductor supply chain, particularly the increasing discord between the U.S. and China, which poses a risk to South Korea’s AI advancements. Although South Korea has diverted some of its chip exports from China to other regions, over 30% of its chip exports still went to China and Hong Kong in 2023, with approximately the same amount exported to the U.S.
The report highlights that if U.S.-China tensions worsen and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, South Korea’s memory semiconductor exports could face significant challenges.
Additionally, South Korean chip manufacturers rely on China for essential components and equipment necessary for chip production. Should these geopolitical tensions disrupt the supply chain, it would complicate access to the tools needed by South Korean companies to produce chips.
There are reports that the U.S. has requested South Korea to limit exports to China of equipment and technology for producing memory and advanced logic chips, specifically those advanced beyond 14-nanometer and DRAM memory chips over 18-nanometer. South Korean officials are reportedly considering this request, taking into account potential consequences for major companies like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In related developments, the Biden administration is contemplating implementing an export control known as the foreign direct product rule on allies that continue to sell chipmaking technologies and equipment to China. This rule prohibits the export of any products manufactured with a certain percentage of U.S. intellectual property to any country.