South Korea is experiencing a notable productivity increase attributed to artificial intelligence, making it one of the few economies worldwide to benefit from this technological advancement. However, analysts from Bank of America have warned that escalating tensions between the U.S. and China regarding semiconductor chips could pose challenges to South Korea’s growth.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a major beneficiary from the AI surge, with exports rising over 50% year-on-year. Analysts predict that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will enhance its position in the adoption of AI technologies.
Despite these advancements, the report highlights potential geopolitical tensions that may impact the semiconductor supply chain, particularly due to ongoing strains between the U.S. and China. South Korea has made progress in diversifying its chip exports from China to other regions, yet more than 30% of its chip exports were still directed to China and Hong Kong in 2023, a figure comparable to its exports to the U.S.
Bank of America analysts noted that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on the export of advanced or AI-related chips to China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential chipmaking components and equipment. Thus, any disruption in the supply chain due to heightened tensions would complicate South Korean firms’ ability to obtain the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, particularly those surpassing the 14-nanometer and 18-nanometer thresholds. South Korean officials are reportedly considering the U.S. request due to potential implications for major corporations like Samsung and SK Hynix, which have operations in China—their largest trading partner.
In parallel, the Biden administration is contemplating the application of an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any product to any nation if it incorporates a specified percentage of U.S. intellectual property components in its manufacture.