Bank of America analysts have noted that South Korea is witnessing a productivity increase from artificial intelligence, a trend not observed in many other global economies. However, they caution that escalating U.S.-China tensions over semiconductor technology could pose risks to South Korea’s growth trajectory.
The semiconductor sector is crucial for South Korea, representing 17% of its total exports. A recent report from Bank of America Global Research highlights that the nation has emerged as a significant beneficiary of the AI surge, with its exports soaring more than 50% year-over-year. The report emphasizes that South Korea’s substantial investments in AI research and development, coupled with a rise in AI-related patents, are likely to enhance its capabilities in adopting AI technologies.
Nevertheless, the analysts pointed out that geopolitical disputes could disrupt the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China. Although South Korea has sought to diversify its chip exports beyond China, the report indicates that more than 30% of its chip exports still went to China and Hong Kong in 2023, with a similar proportion directed towards the U.S.
The analysts warned that if U.S.-China tensions escalate and the U.S. enforces additional trade restrictions on advanced chips and AI-related exports to China, it could significantly impact South Korea’s memory semiconductor exports.
Moreover, South Korean semiconductor firms rely on China for critical components and manufacturing equipment. Any disruption in these supplies caused by geopolitical strains could hinder their ability to produce chips effectively.
The U.S. has reportedly urged South Korea to limit exports of chip manufacturing equipment and technology to China, specifically targeting memory processors and advanced logic chips. South Korean officials are considering this request due to potential impacts on major firms like Samsung and SK Hynix, both of which have significant operations in China, the country’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating aligning with an export control mechanism known as the foreign direct product rule, which would restrict trade with allies that continue to provide chipmaking tools to China. This rule would prevent the export of products incorporating a certain percentage of U.S. intellectual property to any nation.