South Korea is experiencing a unique productivity boost driven by artificial intelligence, according to analysts at Bank of America. However, escalating U.S.-China tensions regarding semiconductor technology could pose significant risks to the country’s economic growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation is benefiting from the AI boom, reporting over a 50% increase in exports year-over-year. Bank of America’s Global Research report indicates that South Korea’s significant investments in AI research and development, alongside a rise in AI-related patents, will likely enhance its position in AI technology adoption in the long run.
Nonetheless, the report cautions that geopolitical tensions may impact the supply chain for semiconductors, primarily due to the ongoing friction between the U.S. and China. Although South Korea has begun to shift its chip exports away from China to other regions, over 30% of its semiconductor exports in 2023 still went to China and Hong Kong, which is a concern as exports to the U.S. were nearly the same.
The analysts warn that if geopolitical tensions intensify and the U.S. imposes further trade restrictions on AI-related semiconductor exports to China, it could severely affect South Korea’s memory chip exports. Additionally, South Korean semiconductor manufacturers rely on China for crucial components and equipment. Any disruption in the supply chain caused by these tensions may hinder their ability to produce chips efficiently.
The U.S. has reportedly urged South Korea to limit its exports of chip manufacturing equipment and technology to China, particularly for advanced logic chips and DRAM memory chips. South Korean officials are deliberating over this request due to potential repercussions for major domestic corporations like Samsung and SK Hynix, which have substantial operations in China, the country’s largest trading partner.
In parallel, the Biden administration is considering applying an export control known as the foreign direct product rule to allied countries that continue to supply chipmaking equipment to China. This rule would prohibit the export of certain goods if they were produced using a specified percentage of U.S. intellectual property.