South Korea is experiencing a notable productivity increase due to artificial intelligence, making it one of the few economies worldwide benefiting from this technological advancement. However, analysts at Bank of America caution that escalating U.S.-China tensions regarding semiconductors may hinder this progress.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, with the country emerging as a major beneficiary of the AI boom, resulting in a more than 50% annual increase in exports. Analysts believe that South Korea’s significant investments in AI research and development, alongside a rise in AI-related patents, are likely to bolster its leadership in AI adoption over the long term.
Despite these positive indicators, analysts warn that geopolitical issues could disrupt the semiconductor supply chain, particularly the rising friction between the U.S. and China, which poses a threat to South Korea’s AI growth. While South Korea has started to diversify its chip exports beyond China to other regions, over 30% of its semiconductor exports in 2023 were still directed to China and Hong Kong, with a similar proportion exported to the U.S.
The analysts noted that should geopolitical tensions escalate and the U.S. impose stricter trade restrictions on advanced or AI-related semiconductor exports to China, it could greatly affect South Korea’s memory chip exports. Notably, South Korean semiconductor manufacturers rely on China for various chipmaking components and equipment, meaning that any disruptions in supply chains caused by increased tensions would complicate the production processes for these companies.
Additionally, the U.S. has reportedly urged South Korea to limit exports of technology and equipment used for producing advanced memory chips and logic chips to China. South Korean officials are considering this request, aware of the potential impact on major domestic firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is evaluating the possibility of enforcing export controls, specifically the foreign direct product rule, on allies that continue to provide chipmaking tools and equipment to China. This regulation would prevent the export of any goods manufactured with a certain percentage of U.S. intellectual property to any nation.