South Korea is currently experiencing a boost in productivity driven by artificial intelligence, distinguishing itself among global economies. However, analysts from Bank of America caution that growing tensions between the U.S. and China, particularly regarding semiconductor supply chains, could pose risks to this growth.
According to a Bank of America Global Research report, the semiconductor industry constitutes 17% of South Korea’s exports, and the nation has emerged as a significant benefactor of the AI boom, with exports increasing by over 50% year-over-year. Analysts expect that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its status in AI adoption over the long term.
Nevertheless, the report notes that potential geopolitical conflicts could impact the semiconductor supply chain, especially the escalating tensions between the U.S. and China, which could challenge South Korea’s AI growth. Although South Korea has made strides in diversifying its chip exports beyond China, the country and Hong Kong accounted for more than 30% of South Korea’s chip exports in 2023, with exports to the U.S. being similarly significant.
Bank of America analysts remarked that should geopolitical tensions worsen and lead to further U.S. trade restrictions on the export of advanced or AI-related chips to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment needed for chip production. Thus, any disruption in the supply chain due to geopolitical tensions could hinder these firms’ ability to produce chips effectively.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology required for manufacturing memory chips and advanced logic chips, specifically those beyond certain technological thresholds. South Korean officials are reportedly considering this request, mindful of the implications it could have on major companies like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Furthermore, the Biden administration is contemplating implementing an export control measure known as the foreign direct product rule, which would restrict allies from selling chipmaking tools and equipment to China if these goods are produced using a certain percentage of U.S. intellectual property.