Bank of America analysts report that South Korea is experiencing a rare productivity surge driven by artificial intelligence, although rising tensions between the U.S. and China regarding semiconductor supplies may pose risks to this growth.
The semiconductor sector contributes significantly to the South Korean economy, representing 17% of its exports. According to the analysts, the country has emerged as a major beneficiary of the AI boom, with exports increasing by more than 50% compared to last year. They believe that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will strengthen its standing in AI utilization over time.
Nevertheless, analysts caution that geopolitical conflicts, particularly regarding U.S.-China relations, could negatively impact the semiconductor supply chain and, as a result, AI advancements in South Korea. Although the nation has diversified its chip exports, over 30% of its semiconductor shipments in 2023 were directed toward China and Hong Kong, with exports to the U.S. being roughly equal.
Bank of America analysts warned that if U.S.-China tensions escalate and if the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, the effects could severely impact South Korean memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Any disruption in the supply chain resulting from ongoing tensions could hinder their ability to obtain the necessary tools for semiconductor fabrication.
The U.S. has reportedly requested that South Korea limit exports to China of technology and equipment used for advanced memory chips and logic chips, particularly those with specifications exceeding 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are evaluating this request, considering its potential implications for major domestic firms like Samsung and SK Hynix, both of which have significant operations in China, South Korea’s largest trading partner.
Simultaneously, the Biden administration is contemplating applying an export control mechanism known as the foreign direct product rule on allied nations that continue to supply chipmaking tools to China. This rule would prevent any item from being exported to any nation if it is produced using a specific percentage of U.S. intellectual property.