South Korea is increasingly benefiting from a productivity surge driven by artificial intelligence, according to analysts at Bank of America. Nonetheless, rising tensions between the U.S. and China regarding semiconductor chips could hinder the nation’s growth trajectory.
A report from Bank of America Global Research states that the semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI boom, witnessing a remarkable increase in exports of over 50% year-over-year. The analysts expressed optimism regarding South Korea’s extensive investment in AI research and development, alongside a growing number of AI-related patents, which they believe will enhance the nation’s standing in AI adoption in the long run.
However, they also cautioned that potential geopolitical tensions might impact the semiconductor supply chain, particularly amidst the escalating U.S.-China rivalry. Despite South Korea diversifying its chip exports beyond China to other regions, the report indicates that over 30% of its chip exports in 2023 were directed towards China and Hong Kong, with similar figures for exports to the U.S.
Bank of America analysts warned that if geopolitical conflicts intensify and the U.S. imposes further trade restrictions on advanced and AI-related chip exports to China, it could severely jeopardize South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment, meaning that any disruptions in the supply chain from heightened tensions could hamper their ability to produce chips effectively.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology necessary for producing memory and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request, weighing the potential repercussions on major domestic companies like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In related developments, the Biden administration is contemplating applying an export control known as the foreign direct product rule to allies that continue to supply chipmaking tools and equipment to China. This regulation would prevent the export of any product to any nation if it is produced with a certain percentage of U.S. intellectual property components.