South Korea is experiencing a notable productivity increase fueled by artificial intelligence, making it one of the few economies globally to benefit from this trend. However, analysts from Bank of America have suggested that escalating tensions between the U.S. and China regarding semiconductor technology could pose challenges to South Korea’s growth prospects.
The semiconductor sector is vital to South Korea, accounting for 17% of the nation’s exports. A report from Bank of America Global Research highlights that the country has emerged as the largest beneficiary of the AI surge, with exports rising over 50% compared to the previous year. Analysts believe that South Korea’s substantial investments in AI research and development, combined with an increasing number of AI-related patents, will help solidify its leadership in AI utilization.
Despite these positive indicators, potential geopolitical conflicts, particularly between the U.S. and China, may impact the semiconductor supply chain. While South Korea has made efforts to diversify its chip exports beyond China, over 30% of its chip exports were directed to China and Hong Kong in 2023, with exports to the U.S. approximately matching that figure.
Bank of America analysts cautioned that should tensions escalate and the U.S. implement further trade restrictions on advanced or AI-related chip exports to China, it could significantly hinder South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment needed for chip production. Disruptions in the supply chain due to geopolitical tensions could complicate the ability of South Korean companies to obtain necessary production tools.
The U.S. has reportedly requested that South Korea limit its exports of equipment and technology used for producing memory chips and advanced logic chips, specifically those utilizing technology more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are considering this request amid concerns about potential impacts on major firms like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating the application of 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 prevent the export of goods to any country if they are manufactured using a specified percentage of U.S. intellectual property components.