South Korea is experiencing a notable productivity increase linked to artificial intelligence, setting it apart as one of the world’s few economies benefitting in this way. However, analysts from Bank of America caution that rising tensions between the U.S. and China regarding semiconductor chips could pose a significant obstacle to this growth.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, making the country a major beneficiary of the AI surge, with exports rising over 50% compared to the previous year. Analysts believe that consistent investments in AI research and development, coupled with an increasing number of AI-related patents, will enhance South Korea’s position in AI adoption over the long run.
On the flip side, potential geopolitical strains could impact the supply chain for semiconductors, particularly as tensions escalate between the U.S. and China. While South Korea has begun to diversify its chip exports away from China, the report indicates that more than 30% of its chip exports in 2023 still went to China and Hong Kong, with similar exports headed to the U.S.
Bank of America analysts warned that if U.S. trade restrictions on advanced or AI-related chip exports to China intensify, it could have a detrimental effect on Korea’s memory semiconductor exports.
Moreover, South Korean chip producers rely on Chinese suppliers for various chipmaking components and machinery. A disruption in these supply chains due to rising geopolitical tensions would complicate the ability of South Korean companies to obtain the necessary tools for chip production.
The U.S. government has reportedly urged South Korea to limit exports of equipment and technology intended for manufacturing memory and advanced logic chips to China. This includes advanced logic chips exceeding 14-nanometer technologies and DRAM memory chips beyond 18-nanometer technologies. South Korean officials are reportedly considering this request due to potential impacts on major national firms, including Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is deliberating the implementation of an export control measure known as the foreign direct product rule, aimed at allies that continue supplying chipmaking tools to China. This regulation would prevent any good from being exported if it is produced using a specific percentage of U.S. intellectual property components.