South Korea is experiencing a notable productivity increase driven by artificial intelligence, distinguishing it as one of the few economies globally benefiting from this technological advancement. However, analysts from Bank of America warn that rising tensions between the U.S. and China over semiconductor issues could pose a threat to this growth.
The semiconductor sector represents a significant portion of South Korea’s economy, accounting for 17% of its exports. A report from Bank of America Global Research highlights that South Korea has emerged as a major beneficiary of the AI surge, with its exports rising over 50% year-on-year. The report emphasizes that South Korea’s substantial investments in AI research and development, along with a growing number of AI-related patents, are expected to bolster its position in AI application in the long term.
Despite these positive indicators, analysts express concerns that intensified geopolitical tensions could negatively affect the semiconductor supply chain, particularly due to the strained relationship between the U.S. and China. Although South Korea has diversified its semiconductor exports away from China, the nation still sent over 30% of its chip exports to China and Hong Kong in 2023, with exports to the U.S. reaching similar levels.
Bank of America analysts noted that if U.S.-China tensions escalate further, resulting in new trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor trade.
Additionally, South Korean semiconductor manufacturers rely on China for essential chipmaking components and equipment. Any disruptions in relations could complicate the procurement of necessary tools for chip production.
The U.S. government has reportedly urged South Korea to limit its exports to China of equipment and technologies used for manufacturing advanced memory chips and logic chips, particularly those more sophisticated than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean officials are reportedly considering this request due to potential impacts on major companies such as Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In a parallel development, the Biden administration may utilize an export control mechanism known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This regulation prohibits the export of any goods from any country if they are manufactured using a certain percentage of U.S. intellectual property components.