South Korea stands out as one of the few economies experiencing a productivity increase due to artificial intelligence, although analysts from Bank of America warn that escalating tensions between the U.S. and China regarding semiconductor technology could hinder this growth.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, and the country has been a significant beneficiary of the AI surge, with exports rising more than 50% year-over-year. The report emphasizes that ongoing investments in AI research and development, along with a growing portfolio of AI-related patents, are likely to bolster South Korea’s position in the AI landscape.
Nevertheless, the analysts caution that geopolitical dynamics may impact the semiconductor supply chain, particularly due to increasing tensions between the U.S. and China, which could pose a threat to South Korea’s AI advancements. Despite efforts to diversify chip exports away from China, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, while exports to the U.S. were comparable.
The report warns that if conflicts escalate and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, this could significantly affect memory semiconductor exports from South Korea. Additionally, South Korean chip manufacturers rely on China for crucial components and equipment necessary for chip production, meaning any supply chain disruptions could impede their ability to manufacture chips.
The U.S. has reportedly urged South Korea to limit exports to China of technologies and equipment involved in making memory and advanced logic chips, specifically those exceeding 14-nanometer for logic chips and beyond 18-nanometer for DRAM memory. South Korean officials are considering this request, taking into account potential repercussions for major firms like Samsung and SK Hynix, which have substantial operations in China, the country’s largest trading partner.
In a related development, the Biden administration is exploring the application of an export control mechanism known as the foreign direct product rule to allies that continue to supply chip-making tools to China. This rule would prevent the export of any product to any country if it contains a specified proportion of U.S. intellectual property.