South Korea is experiencing a productivity surge due to artificial intelligence, according to analysts at Bank of America. However, rising tensions between the U.S. and China over semiconductor technology might pose risks to this growth.
The semiconductor sector is vital for South Korea, representing 17% of the country’s exports. A report from Bank of America Global Research notes that South Korea has emerged as a significant beneficiary of the AI boom, with exports rising over 50% year-on-year. Analysts believe that the country’s substantial investment in AI research and development, coupled with a growing number of AI-related patents, will enhance its capabilities in AI adoption over the long term.
Nonetheless, the report highlights that “potential geopolitical tensions could weigh on the semiconductors supply chain,” particularly the intensifying tensions between the U.S. and China. Although South Korea has begun to shift its chip exports away from China, the two nations, along with Hong Kong, still accounted for more than 30% of South Korea’s chip exports in 2023. Exports to the U.S. represented a similar proportion.
The analysts warn that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it 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 to the supply chain caused by rising tensions could hinder the ability of South Korean companies to obtain the essential tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips—specifically, those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, mindful of potential repercussions for major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In related developments, the Biden administration is contemplating implementing an export control named the foreign direct product rule. This regulation would prevent the export of any goods from any country if they are made using a specific percentage of U.S. intellectual property components, targeting allies that continue selling chipmaking tools and equipment to China.