South Korea is experiencing a unique boost in productivity driven by artificial intelligence, though analysts at Bank of America warn that rising tensions between the U.S. and China regarding semiconductor technology could hinder its growth.
The semiconductor sector contributes significantly to South Korea’s economy, constituting 17% of its exports. According to a report from Bank of America Global Research, South Korea has emerged as the largest beneficiary of the current AI boom, with semiconductor exports increasing by over 50% on a year-over-year basis. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rise in AI-related patents, will enhance the nation’s adoption of AI in the long run.
However, analysts caution that geopolitical tensions may disrupt the semiconductor supply chain, especially due to the ongoing friction between the U.S. and China. Despite South Korea’s efforts to broaden its chip export markets beyond China, more than 30% of the country’s chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being comparable.
Bank of America analysts expressed concerns that escalating geopolitical tensions and potential U.S. trade restrictions on advanced or AI-related chip exports to China could severely impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for various components and equipment essential for chip production. Disruptions in the supply chain due to rising tensions could hinder South Korean firms’ access to the necessary tools for chip manufacturing.
In addition, reports indicate that the U.S. has requested South Korea to limit exports of semiconductor manufacturing equipment and technology to China, targeting advanced logic chips beyond 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly considering the U.S. request, taking into account its potential impacts on major firms such as Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Meanwhile, the Biden administration is contemplating employing an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would restrict the export of any product to any nation if it is produced with a certain percentage of U.S. intellectual property.