South Korea is experiencing a notable increase in productivity driven by artificial intelligence, though rising tensions between the U.S. and China over semiconductor trade may pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a key benefactor of the AI surge, with exports rising more than 50% year-over-year, as highlighted in a report from Bank of America Global Research. Analysts believe that South Korea’s significant investments in AI research and development, alongside an uptick in AI-related patents, will bolster its status in AI utilization in the long run.
However, the report cautions that “potential geopolitical tensions could weigh on the semis supply chain,” particularly due to escalating friction between the U.S. and China. Even with a move to diversify chip exports from China to other regions, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with a similar percentage going to the U.S.
Bank of America analysts warned that if geopolitical tensions intensify and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could substantially impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. As such, any disruption in the supply chain due to geopolitical tensions would complicate the procurement of essential tools for South Korean companies.
Additionally, reports indicate that the U.S. has requested South Korea to limit exports to China of certain equipment and technology needed for manufacturing memory chips and advanced logic chips. South Korean officials are reportedly considering this request in light of its potential impact on major firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule prohibits the export of any items made using a specific percentage of U.S. intellectual property components to any country.