South Korea is experiencing a notable productivity increase attributed to advancements in artificial intelligence, according to analysts from Bank of America. However, escalating tensions between the U.S. and China regarding semiconductor technology may pose risks to its growth trajectory.
The semiconductor sector is crucial to South Korea’s economy, constituting 17% of its total exports. A report from Bank of America Global Research highlighted that the country has emerged as a significant beneficiary of the AI surge, seeing an impressive 50% increase in exports year-over-year. Analysts believe that South Korea’s significant investments in AI research and development, coupled with a rise in AI-related patents, will reinforce its standing in AI adoption moving forward.
Nevertheless, the report also cautions that geopolitical issues could exert pressure on the semiconductor supply chain, particularly as U.S.-China relations continue to strain. While South Korea has diversified its chip exports away from China, over 30% of its chip exports still went to China and Hong Kong in 2023, roughly the same amount directed to the U.S.
Bank of America analysts warned that if geopolitical tensions intensify, particularly if the U.S. imposes further trade restrictions on exports of advanced or AI-related chips to China, it could significantly impact South Korea’s memory semiconductor export business.
Additionally, South Korean chip manufacturers rely on China for essential components and equipment. Disruptions in supply chains due to rising tensions could hinder these manufacturers’ access to the necessary tools for chip production.
The U.S. has reportedly requested South Korea to limit its exports to China of equipment and technology used in the production of memory chips and high-end logic chips, specifically those exceeding 14-nanometer technology and DRAM memory beyond 18-nanometer. South Korean officials are currently deliberating on this request due to potential consequences for major local companies like Samsung and SK Hynix, which operate in China, its largest trading partner.
In parallel, the Biden administration is considering applying an export control mechanism known as the foreign direct product rule on allies that continue to export chipmaking tools and equipment to China. This rule would prevent the export of any products to a foreign nation if they are made using a specified percentage of U.S. intellectual property components.