South Korea is experiencing a rare productivity increase due to artificial intelligence, yet analysts from Bank of America caution that escalating U.S.-China tensions over semiconductor issues could pose challenges for the economy’s growth trajectory.
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The semiconductor sector is crucial for South Korea, representing 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 exports rising over 50% compared to the previous year. Analysts believe that the country’s substantial investments in AI research and development, alongside a growing patent portfolio in AI technologies, will bolster its position in AI integration over the long term.
Nevertheless, the report warns that increasing geopolitical tensions may impact the semiconductor supply chain, particularly concerning the fraught relationship between the U.S. and China. Although South Korea has made progress in diversifying its chip exports beyond China, the report notes that over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with exports to the U.S. being similar.
Should geopolitical tensions escalate, particularly if the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could significantly disrupt South Korea’s memory semiconductor exports, according to the analysts.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruptions in the supply chain stemming from heightened tensions would complicate the ability of South Korean companies to obtain necessary tools for semiconductor manufacturing.
Reportedly, the U.S. has requested South Korea to limit its exports to China of tools and technology used for producing memory chips and advanced logic chips, specifically those with greater than 14-nanometer technology and DRAM chips exceeding 18-nanometer technology. South Korean officials are pondering this U.S. request, considering potential impacts on significant firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is said to be contemplating the application of an export control known as the foreign direct product rule on allies that continue to sell semiconductor manufacturing tools to China. This rule would prohibit exporting any product to any country if it incorporates a specific percentage of U.S. intellectual property.