South Korea is experiencing a unique productivity boost from artificial intelligence, making it one of the few economies globally to benefit from this trend. However, analysts from Bank of America warn that ongoing tensions between the U.S. and China over semiconductor technology could pose significant challenges to this growth.
According to a report from Bank of America Global Research, the semiconductor sector is vital for South Korea, comprising 17% of its exports. The country has emerged as a major beneficiary of the AI boom, with exports in this area rising by over 50% compared to the previous year. Analysts express optimism about South Korea’s future in AI, citing substantial investments in research and development and an increasing number of AI patents as factors that will enhance its AI adoption.
Despite these positive insights, analysts caution that escalating geopolitical tensions could disrupt the semiconductor supply chain, particularly due to strained relations between the U.S. and China. The report highlights that while South Korea has diversified its chip exports beyond China, over 30% of its chip exports still went to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar proportion.
The analysts noted that if U.S.-China tensions worsen and if the U.S. implements additional trade restrictions on advanced chips and AI-related components destined for China, this could severely impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment used in chip production. Disruptions in the supply chain due to geopolitical conflicts could hinder these manufacturers’ ability to source essential tools for chip fabrication.
Additionally, reports suggest that the U.S. has requested South Korea to impose restrictions on exports to China of equipment and technology utilized in producing memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean officials are reportedly considering the implications of these requests, given the potential impact on major domestic companies, including Samsung and SK Hynix, both of which have operations in China, its largest trading partner.
Meanwhile, the Biden administration is reportedly exploring the application of an export control mechanism known as the foreign direct product rule on allies that persist in supplying chipmaking tools to China. This rule prohibits the export of any product linked to a certain percentage of U.S. intellectual property to any country.