South Korea remains one of the few nations experiencing a productivity increase due to artificial intelligence, although escalating tensions between the U.S. and China regarding semiconductor trade could hinder its growth, according to analysts at Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, with the country reportedly being the biggest beneficiary of the AI surge, as exports have risen by more than 50% year-over-year, as highlighted in a Bank of America Global Research report. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will enhance its position in AI utilization in the long term.
Nevertheless, the report warns that potential geopolitical tensions could impact the semiconductor supply chain, particularly the ongoing discord between the U.S. and China, which presents a risk to AI expansion in South Korea. While efforts have been made to diversify chip exports away from China, over 30% of its semiconductor exports in 2023 were directed to China and Hong Kong, a figure that was similar for exports to the U.S.
Bank of America analysts stated that if geopolitical tensions escalate and the U.S. enforces stricter trade limitations on advanced or AI-related chip exports to China, it could severely affect memory semiconductor exports from Korea.
Moreover, South Korean chip producers rely on China for certain components and equipment needed in chip manufacturing. A disruption in the supply chain due to increasing tensions would make it challenging for these manufacturers to procure the essential tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology necessary for the production of memory chips and advanced logic chips, specifically those chips that are more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request due to potential impacts on key domestic firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the application of export controls, such as the foreign direct product rule, on allies that continue to provide chipmaking tools and equipment to China. This rule prevents the export of any goods to any nation if they are produced with a particular percentage of U.S. intellectual property.