South Korea is reportedly experiencing a productivity increase due to artificial intelligence, making it one of the few economies worldwide to benefit from this trend. However, analysts from Bank of America caution that rising U.S.-China tensions regarding semiconductors could potentially hinder this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and according to a recent report from Bank of America Global Research, the nation has emerged as a primary beneficiary of the AI surge, seeing a more than 50% year-over-year rise in exports. Analysts believe that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will bolster its position in AI utilization over the long term.
Nevertheless, potential geopolitical strains could impact the semiconductor supply chain, particularly amid the intensifying rivalry between the U.S. and China. The report notes that while South Korea has diversified its chip exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being roughly equivalent.
Bank of America analysts warned that if tensions escalate and the U.S. enforces stricter trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for essential components and equipment needed for chip production. Any disruptions in the supply chain resulting from geopolitical tensions could complicate the ability of South Korean companies to acquire the necessary tools for chip manufacturing.
Reports indicate that the U.S. has urged South Korea to limit exports to China of equipment and technology critical for producing memory chips and advanced logic chips, particularly those classified as more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are evaluating this request, considering potential repercussions for major firms like Samsung and SK Hynix that operate in China, which is their largest trading partner.
In a related development, the Biden administration is said to be contemplating the application of an export control known as the foreign direct product rule to allies that continue to supply chipmaking tools and equipment to China. This rule restricts the export of any product to any country if it contains a specified percentage of U.S. intellectual property components.