South Korea is experiencing a notable increase in productivity driven by artificial intelligence, but analysts from Bank of America warn that rising U.S.-China tensions over semiconductor issues could hinder the country’s growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a leading benefactor of the AI surge, reporting over a 50% increase in exports year-over-year. Analysts believe that South Korea’s substantial investment in AI research and development, along with a growing number of AI-related patents, is likely to enhance its adoption of AI technologies in the long run.
However, the analysts caution that geopolitical factors may pressure the supply chains for semiconductors, particularly the escalating tensions between the U.S. and China. Despite efforts to diversify chip exports away from China, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with a similar proportion exported to the U.S.
If tensions escalate further, especially if the U.S. enacts additional trade restrictions on advanced semiconductors shipped to China, South Korean exports of memory chips could face significant setbacks, according to Bank of America’s assessment.
Moreover, South Korean chip manufacturers rely on China for critical components and equipment necessary for chip production. Disruptions in the supply chain due to geopolitical tensions would complicate access to the tools needed for chip fabrication.
Reports suggest that the U.S. has requested South Korea to limit exports to China of machinery and technology used in the production of memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM chips exceeding 18-nanometers. South Korean officials are reportedly considering this request due to the potential impact on major domestic companies, including Samsung and SK Hynix, which have operations in China, its largest trading partner.
In response to ongoing concerns, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule, targeting allies that continue to supply chip manufacturing equipment and technology to China. This rule would prevent the export of any goods to any nation if they are produced using a specified percentage of U.S. intellectual property.