South Korea stands out as one of the few economies globally experiencing a productivity increase thanks to artificial intelligence. However, analysts from Bank of America warn that rising tensions between the U.S. and China over semiconductor chips may hinder this growth.
According to a report by Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as the largest beneficiary of the AI boom, with exports rising more than 50% year-over-year. Analysts predict that the country’s substantial investment in AI research and development, along with a growing number of AI-related patents, will further solidify its leadership in AI adoption.
Despite this promising outlook, analysts caution that increasing geopolitical tensions could impact the semiconductor supply chain. The ongoing friction between the U.S. and China poses a significant challenge to AI growth in South Korea. While the nation has taken steps to diversify its chip exports beyond China, over 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being similar.
Bank of America analysts indicated that should geopolitical tensions escalate and the U.S. impose further trade restrictions on advanced or AI-related chip exports to China, it might severely impact South Korea’s memory chip exports.
South Korean chip manufacturers also rely on China for essential chipmaking components and equipment. Disruptions in these supply chains due to increased tensions could complicate access for South Korean firms looking to obtain necessary tools for chip production.
Furthermore, the U.S. has reportedly requested that South Korea limit exports to China of equipment and technology required for producing advanced memory and logic chips. South Korean officials are deliberating this request, considering the potential impact on major domestic companies such as Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating applying an export control known as the foreign direct product rule on allies who continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods to any country if they are manufactured with a specified percentage of U.S. intellectual property components.