South Korea is experiencing a significant boost in productivity thanks to artificial intelligence, according to analysts at Bank of America. However, tensions between the U.S. and China regarding semiconductor technology could pose risks to this growth.
The semiconductor sector plays a crucial role in South Korea’s economy, accounting for 17% of its total exports. A report from Bank of America Global Research revealed that the country has emerged as a major beneficiary of the AI surge, with semiconductor exports increasing by over 50% year-on-year. The analysts project that South Korea’s substantial investments in AI research and increasing numbers of AI-related patents will enhance its position in the adoption of AI technologies.
Despite this optimistic outlook, the analysts cautioned that escalating geopolitical tensions could impact the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China. While South Korea has made efforts to diversify its chip exports beyond China, over 30% of its semiconductor exports were still directed towards China and Hong Kong in 2023, with similar levels of exports going to the United States.
The Bank of America analysts warned that if tensions escalate further, and the U.S. imposes additional trade restrictions on advanced semiconductor exports to China, it could severely impact South Korea’s memory chip exports. South Korean manufacturers are also reliant on China for essential components and equipment needed in chip production. Any disruption in the supply chain as a result of geopolitical tensions could hinder the ability of South Korean companies to procure the necessary tools for chip manufacturing.
The U.S. has reportedly urged South Korea to limit exports to China related to chipmaking technology and equipment, focusing on memory and advanced logic chips. South Korean authorities are reportedly considering this request while weighing the potential consequences for major South Korean firms such as Samsung and SK Hynix, which have substantial operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating the implementation of an export control policy known as the foreign direct product rule, aimed at allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of any products manufactured using a certain percentage of U.S. intellectual property materials to any country.