South Korea is experiencing a notable productivity increase attributed to artificial intelligence, although escalating U.S.-China tensions regarding semiconductor exports could pose risks to this growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s total exports, and it has emerged as the leading beneficiary of the AI surge, with exports rising by over 50% year-on-year, as detailed in a report by Bank of America Global Research. Analysts believe that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will strengthen the country’s position in AI adoption in the long run.
However, analysts also cautioned that geopolitical tensions could negatively impact the semiconductor supply chain, particularly amidst rising strife between the U.S. and China. Although South Korea has taken steps to diversify its chip exports beyond China, the report noted that China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. making up a similar share.
Should U.S.-China tensions escalate, particularly if the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports, Bank of America analysts warned.
Moreover, South Korean chip producers rely on China for certain components and equipment necessary for chip manufacturing. If geopolitical tensions disrupt the supply chain, South Korean companies may struggle to acquire essential tools for chip production.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology utilized in producing memory chips and advanced logic chips, particularly those exceeding 14-nanometer logic chips and 18-nanometer DRAM memory chips. South Korean officials are considering this request due to potential implications for significant South Korean corporations like Samsung and SK Hynix, which have operations in China, their largest trading partner.
Simultaneously, the Biden administration is evaluating the possibility of employing an export control measure called the foreign direct product rule against allies that continue to provide China with chipmaking tools and equipment. This rule prohibits the export of any goods to any country if those goods contain a certain percentage of U.S. intellectual property components.