South Korea is experiencing a unique productivity increase driven by artificial intelligence, although growing tensions between the U.S. and China regarding semiconductors could hinder this growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, with the country becoming a major beneficiary of the AI surge, experiencing over a 50% rise in exports year-over-year, as highlighted in a report from Bank of America Global Research. Analysts believe that the nation’s substantial investments in AI research and development, alongside an increase in AI-related patents, will further strengthen its position in AI adoption in the long run.
However, the report also warns that geopolitical tensions may impact the semiconductor supply chain, especially the escalating discord between the U.S. and China, which could present obstacles to South Korea’s AI growth. Although South Korea has diversified its chip exports beyond China, over 30% of its semiconductor exports in 2023 still went to China and Hong Kong, with exports to the U.S. being roughly equivalent.
Bank of America analysts cautioned that if geopolitical tensions escalate and the U.S. enacts further trade restrictions on exports of advanced or AI-related chips to China, it could have a serious negative effect on South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Any disruption in these supply chains due to geopolitical tensions could complicate the procurement of essential tools needed for semiconductor production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, particularly those exceeding 14-nanometer in logic chips and beyond 18-nanometer in DRAM memory chips. South Korean officials are reportedly considering this request while weighing the potential impacts on major domestic companies such as Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Furthermore, the Biden administration is reportedly contemplating applying an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any products to any nation if they are produced with a specified percentage of U.S. intellectual property components.