South Korea is experiencing a productivity increase attributed to artificial intelligence, positioning it as one of the few economies benefiting from this technological advancement, according to analysts from Bank of America. However, rising tensions between the U.S. and China regarding semiconductor chips could pose threats to South Korea’s growth trajectory.
The semiconductor sector represents 17% of South Korea’s exports, with the country identified as the leading beneficiary of the AI boom, reporting over a 50% increase in exports year-over-year, as noted in a report by Bank of America Global Research. Analysts anticipate that South Korea’s significant investments in AI research and development, coupled with an increasing array of AI-related patents, will enhance its status in AI adoption moving forward.
Despite these advantages, the report highlights that potential geopolitical tensions could impact the semiconductor supply chain, particularly given the escalating friction between the U.S. and China. While South Korea has begun diversifying its chip exports away from China, more than 30% of its semiconductor exports were still directed to China and Hong Kong in 2023, reflecting a similar statistic for exports to the U.S.
Bank of America analysts warned that if tensions escalate further and the U.S. enforces additional trade restrictions on advanced chips sold to China, it could severely impact Korea’s memory semiconductor exports.
Moreover, South Korean semiconductor manufacturers rely on China for essential components and equipment needed for chip production. Any disruption to this supply chain due to rising tensions could complicate South Korea’s ability to procure the necessary tools for chip manufacturing.
The U.S. has reportedly requested South Korea to limit exports to China of equipment and technology utilized in producing memory and advanced logic chips, particularly those surpassing 14-nanometer and 18-nanometer specifications. South Korean officials are considering this request to avoid potential adverse effects on major domestic companies such as Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In a related development, the Biden administration is contemplating the application of an export control known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This rule prohibits the export of goods to any country if those goods are produced with a certain percentage of U.S. intellectual property components.