South Korea is experiencing a productivity increase thanks to artificial intelligence, making it one of the few economies globally to do so. However, analysts from Bank of America caution that escalating U.S.-China tensions regarding semiconductors might hinder this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI boom, reporting a year-over-year increase in exports exceeding 50%. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will continue to bolster its position in AI implementation.
Despite these advantages, analysts warn that geopolitical tensions could impact the semiconductor supply chain adversely. The increasing strain between the U.S. and China poses a particular threat, as more than 30% of South Korea’s chip exports went to China and Hong Kong in 2023, with exports to the U.S. being similarly significant.
Bank of America analysts noted that if geopolitical tensions escalate further and the U.S. imposes additional restrictions on exports 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 various components and equipment required for chip production. Should diplomatic tensions disrupt the supply chain, South Korean companies may face challenges acquiring the necessary tools for manufacturing semiconductors.
In light of these concerns, the U.S. is reportedly urging South Korea to limit exports to China of equipment and technology used for memory chips and advanced logic chips. South Korean officials are contemplating this request due to potential impacts on major domestic firms, including Samsung and SK Hynix, which maintain operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is considering implementing an export control known as the foreign direct product rule against allies that continue to sell chipmaking equipment to China. This rule would prevent the export of goods to any country if they are produced using a certain percentage of U.S. intellectual property.