South Korea is reportedly experiencing a productivity boost from artificial intelligence, making it one of the few global economies to do so. However, analysts from Bank of America warn that escalating U.S.-China tensions over semiconductor chips may pose challenges to this growth.
The semiconductor sector is vital for South Korea, accounting for 17% of its exports. A recent report from Bank of America Global Research highlights that South Korea has been the largest beneficiary of the AI revolution, with exports soaring more than 50% year-over-year. The report indicates that the country’s significant investments in AI research and development, along with an increase in AI-related patents, will strengthen its position in AI technology adoption in the long run.
Nevertheless, analysts caution that geopolitical tensions could impact the semiconductor supply chain, particularly in light of the ongoing conflict between the U.S. and China. Despite efforts to diversify chip exports to other regions, over 30% of South Korea’s chip exports in 2023 still went to China and Hong Kong, which is comparable to exports directed toward the U.S.
If geopolitical tensions were to escalate further and the U.S. were to impose additional trade restrictions on the export of advanced chips and AI-related technologies to China, it could have a detrimental effect on South Korea’s memory semiconductor exports, according to the analysts.
Moreover, South Korean chip manufacturers rely on China for certain components and machinery essential for chip production. Disruptions in the supply chain due to heightened tensions would complicate the procurement of necessary tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limit exports of chipmaking equipment and technology to China, specifically targeting advanced logic chips exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request, weighing potential repercussions for major local companies such as Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
Additionally, the Biden administration is contemplating applying an export control measure known as the foreign direct product rule to allies that continue selling chipmaking tools to China. This rule would prevent the export of any product manufactured with a specified percentage of U.S. intellectual property to any country.