South Korea is experiencing a rare productivity increase driven by artificial intelligence, according to analysts from Bank of America. However, the ongoing tensions between the U.S. and China over semiconductor technology could pose a threat to this growth.
The semiconductor sector represents 17% of South Korea’s exports and has significantly benefited from the AI surge, with exports reportedly rising over 50% year-over-year. Bank of America Global Research analysts anticipate that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption in the long run.
Nonetheless, the analysts caution that geopolitical tensions, particularly those stemming from U.S.-China relations, could impact the semiconductor supply chain, presenting challenges to South Korea’s AI expansion. Despite diversifying its chip exports beyond China, over 30% of its semiconductor exports in 2023 went to China and Hong Kong, with a similar portion directed to the U.S.
Should tensions escalate and the U.S. impose more trade restrictions on the export of advanced or AI-related chips to China, Bank of America analysts warn that it could significantly harm South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Any disruptions in the supply chain due to heightened tensions could hinder these firms’ ability to procure essential tools for manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports of chipmaking technology and equipment to China, targeting specifically advanced logic chips and DRAM memory chips. South Korean officials are contemplating this request due to potential repercussions for major domestic companies, such as Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In related news, the Biden administration is said to be evaluating the use of an export control measure known as the foreign direct product rule against allies who continue supplying chipmaking tools to China. This rule would prohibit the export of goods manufactured with a specified percentage of U.S. intellectual property to any country.