South Korea is experiencing a productivity increase driven by artificial intelligence, making it one of the few economies benefiting from this trend. However, analysts from Bank of America caution that ongoing tensions between the U.S. and China regarding semiconductor technology could hinder this growth.
According to a Bank of America Global Research report, the semiconductor sector constitutes 17% of South Korea’s exports. The country has seen a remarkable surge in AI-related exports, rising over 50% year-over-year. Analysts are optimistic about South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, suggesting that this will enhance the nation’s capabilities in AI adoption in the long run.
Despite these positive developments, the report highlights potential geopolitical issues that might impact the semiconductor supply chain, particularly the increasing U.S.-China tensions. While South Korea has successfully diversified its chip exports away from China, it still exported over 30% of its chips to China and Hong Kong in 2023, with similar figures for exports to the U.S.
Bank of America analysts warned that if U.S.-China tensions escalate further, leading to more trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory chip exports.
Additionally, South Korean chip manufacturers rely on China for vital components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could make it challenging for these companies to access the tools required for manufacturing.
Reports indicate that the U.S. has requested South Korea to impose restrictions on exporting chipmaking technology and equipment to China, particularly targeting advanced logic chips exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly deliberating on this request, considering the potential impact on major domestic firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Moreover, the Biden administration is contemplating implementing an export control measure known as the foreign direct product rule on allies that continue to provide chipmaking equipment to China. This regulation would prohibit the export of any product manufactured with a specified percentage of U.S. intellectual property components to any other country.