South Korea is experiencing a significant productivity increase driven by artificial intelligence, making it one of the few economies globally to benefit in this way. However, analysts at Bank of America caution that rising U.S.-China tensions over semiconductor technology may pose risks to this growth.
The semiconductor sector is crucial to South Korea’s economy, constituting 17% of its exports. A recent report from Bank of America Global Research highlights that the country has emerged as a major beneficiary of the AI surge, with semiconductor exports witnessing a year-on-year increase exceeding 50%. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will strengthen its role in AI adoption over time.
Despite these positive developments, analysts warn that increasing geopolitical tensions could disrupt the semiconductor supply chain, particularly due to the ongoing rivalry between the U.S. and China. In 2023, over 30% of South Korea’s semiconductor exports went to China and Hong Kong, with similar figures for exports to the U.S.
Bank of America analysts suggest that if geopolitical frictions escalate, resulting in further trade restrictions on advanced semiconductor exports to China, South Korea’s memory chip exports could face significant challenges. Furthermore, South Korean chip manufacturers rely on China for essential components and manufacturing equipment. Disruptions in this supply chain could hinder their production capabilities.
The U.S. has reportedly requested that South Korea limit its exports to China of semiconductor manufacturing equipment and technologies, particularly focusing on advanced logic chips and DRAM memory chips. South Korean officials are considering this request, weighing potential impacts on major companies like Samsung and SK Hynix, which have significant operations in China.
Additionally, the Biden administration is reportedly contemplating the application of an export control measure known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools to China. This rule would prevent the export of goods manufactured with a specific portion of U.S. intellectual property to any nation.