South Korea is experiencing a unique productivity increase linked to artificial intelligence, but analysts from Bank of America warn that U.S.-China tensions regarding semiconductor chips may pose risks to this growth.
According to a recent report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports. The country has emerged as a primary beneficiary of the AI boom, with exports rising by over 50% compared to the previous year. The report indicates that ongoing investments in AI research and development, alongside a surging number of AI-related patents, are likely to bolster South Korea’s position in AI adoption in the long run.
However, the report highlights concerns about potential geopolitical conflicts which could impact the semiconductor supply chain, particularly the rising tensions between the U.S. and China. Although South Korea has begun diversifying its chip exports beyond China, more than 30% of its chip exports still went to China and Hong Kong in 2023. The volume of chip exports to the U.S. is approximately equal.
Bank of America analysts stress that if geopolitical tensions escalate and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers are reliant on China for various chipmaking components and equipment. Disruptions in the supply chain due to heightened tensions could hinder their ability to obtain necessary production tools.
Moreover, reports indicate that the U.S. has requested South Korea to limit exports of certain equipment and technology to China, specifically targeting memory chips and more sophisticated logic chips. South Korean officials are reportedly considering this request, as it could have significant implications for major firms such as Samsung and SK Hynix, both of which have substantial operations in China, its largest trading partner.
In parallel, the Biden administration is rumored to be contemplating the use of an export control known as the foreign direct product rule against allies that continue supplying chipmaking tools and equipment to China. This regulation would prohibit the export of any product to any country if it incorporates a specific percentage of U.S. intellectual property.