South Korea is experiencing a productivity surge driven by artificial intelligence, positioning itself as one of the few economies benefiting from this trend. However, analysts from Bank of America caution that rising tensions between the U.S. and China regarding the semiconductor industry might hinder this growth.
The semiconductor sector constitutes 17% of South Korea’s total exports, and the country has seen a more than 50% increase in AI-related exports year-over-year, according to a comprehensive report from Bank of America Global Research. Analysts project that South Korea’s substantial investments in AI research and development, coupled with a growing number of AI-related patents, will further enhance its capabilities in adopting AI technologies in the long run.
Nonetheless, the report raises concerns about geopolitical tensions potentially impacting the semiconductor supply chain. The escalating discord between the U.S. and China could pose risks to South Korea’s AI growth. Although South Korea has been successful in redirecting its chip exports away from China towards other regions, data shows that over 30% of its chip exports in 2023 were still destined for China and Hong Kong, with exports to the U.S. being comparable.
The analysts noted that if U.S.-China tensions escalate to the point where the U.S. enacts additional trade restrictions on the export of advanced or AI-related chips to China, this could have a detrimental effect on South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential components and equipment used in chip production. Any disruptions to this supply chain due to increased tensions may complicate the capabilities of South Korean companies to source the necessary tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology crucial for producing memory chips and advanced logic chips, particularly those exceeding 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are contemplating this request, mindful of the potential impacts on major South Korean corporations such as Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In related news, the Biden administration is considering the implementation of an export control mechanism known as the foreign direct product rule, aimed at allies that persist in selling chipmaking tools and equipment to China. This regulation would prevent the export of goods to any country if they are produced with a certain proportion of U.S. intellectual property components.