South Korea is experiencing a productivity increase attributed to artificial intelligence, positioning it as one of the few global economies to see such benefits. However, analysts from Bank of America caution that rising tensions between the U.S. and China regarding semiconductor technology may pose risks to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a leading beneficiary of the AI surge, with exports rising over 50% year-on-year. According to the Bank of America Global Research report, the long-term outlook is positive due to South Korea’s significant investments in AI research and development, alongside an increasing number of AI-related patents that are likely to enhance its standing in AI adoption.
Nevertheless, analysts warn that potential geopolitical conflicts could impact the semiconductor supply chain, particularly with the escalating discord between the U.S. and China. Although South Korea has shifted some of its chip exports away from China to other regions, China and Hong Kong still accounted for over 30% of its chip exports in 2023, while exports to the U.S. were roughly equivalent.
Bank of America analysts indicated that if geopolitical tensions were to escalate and the U.S. imposed further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports, which are critical to its economy.
Additionally, South Korean chip manufacturers rely on China for some essential components and equipment necessary for chip production. Disruption of the supply chain due to geopolitical strife could hinder these manufacturers’ ability to obtain the necessary tools for production.
The U.S. has reportedly requested South Korea to limit exports of chipmaking technology and equipment to China, specifically targeting advanced logic chips above 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are deliberating this request, considering its implications for major domestic corporations like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Meanwhile, the Biden administration is contemplating the application of the foreign direct product rule on allied nations that continue to sell chipmaking tools to China. This rule would prevent the export of any product to any country if it is produced using a specific percentage of U.S. intellectual property.