South Korea is experiencing a notable productivity increase attributed to artificial intelligence, distinguishing it from other global economies. However, analysts from Bank of America caution that rising U.S.-China tensions over semiconductor technology may pose challenges to this growth.
The semiconductor sector is crucial for South Korea, making up 17% of its exports. A report from Bank of America Global Research indicates that South Korea is reaping significant benefits from the AI transition, with exports rising over 50% year-over-year. Analysts believe that the country’s substantial investment in AI research and development, coupled with an increasing number of AI-related patents, will enhance its lead in artificial intelligence adoption in the long run.
Despite these advancements, the report warns that escalating geopolitical tensions could strain the semiconductor supply chain. The U.S.-China rivalry is particularly concerning, as more than 30% of South Korea’s chip exports went to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar percentage.
Bank of America analysts noted that if U.S. geopolitical tensions worsen and further trade restrictions are implemented on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could hinder South Korean firms’ ability to acquire essential tools.
Reports suggest that the U.S. has requested South Korea to impose restrictions on exports to China concerning the equipment and technology required for manufacturing memory chips and advanced logic chips, particularly those below 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are reportedly considering the request due to the potential impact on major local companies like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule, which would restrict allies exporting chipmaking tools and equipment to China. This rule stipulates that any goods manufactured with a specific percentage of U.S. intellectual property components cannot be exported to any nation.