South Korea is experiencing a rare productivity increase due to artificial intelligence, according to analysts from Bank of America, but growing tensions between the U.S. and China regarding semiconductor chips may pose significant challenges to its growth.
The semiconductor sector makes up 17% of South Korea’s exports, and a recent report from Bank of America Global Research indicates that the nation has been the biggest beneficiary of the AI boom, with exports surging over 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its standing in AI adoption in the future.
However, the analysts caution that “potential geopolitical tensions could weigh on the semis supply chain,” particularly the escalating friction between the U.S. and China, which could impede AI growth in South Korea. While South Korea has successfully diversified its chip exports beyond China to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being roughly equal.
Bank of America analysts warned that an escalation in geopolitical tensions and the implementation of additional U.S. trade restrictions on advanced or AI-related chip exports to China could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to geopolitical tensions could hinder these firms’ ability to acquire essential manufacturing tools.
The U.S. has reportedly requested that South Korea limit its exports to China of equipment and technology for producing memory chips and advanced logic chips, specifically those beyond 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are considering this request due to potential repercussions for major domestic firms, including Samsung and SK Hynix, which have operations in China, their largest trading partner.
Meanwhile, the Biden administration is reportedly contemplating the application of an export control known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of goods produced with a certain percentage of U.S. intellectual property components to any country.