South Korea stands out as one of the few economies globally experiencing a productivity surge due to artificial intelligence. However, analysts from Bank of America caution that rising tensions between the U.S. and China regarding semiconductors could pose challenges to this growth.
In a recent report, Bank of America Global Research highlighted that the semiconductor sector constitutes 17% of South Korea’s exports. The country has been a major beneficiary of the AI boom, seeing export increases of over 50% year-over-year. Analysts believe that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will enhance its lead in AI adoption over the long term.
Nonetheless, the report raised concerns about potential geopolitical tensions impacting the semiconductor supply chain. Specifically, the existing frictions between the U.S. and China could impede South Korea’s AI growth. While South Korea has successfully diversified its chip exports beyond China, in 2023, over 30% of its chip exports still went to China and Hong Kong, with similar figures for exports to the U.S.
The analysts indicated that if U.S.-China tensions escalate and the U.S. imposes further trade restrictions on exports of advanced or AI-related chips to China, this could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for essential chipmaking components and equipment. Disruptions in the supply chain due to geopolitical tensions could hinder the ability of South Korean companies to obtain the necessary tools for chip production.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips. South Korean officials are reportedly considering the implications of this request on major domestic firms like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
Furthermore, the Biden administration is reportedly contemplating the use of an export control measure known as the foreign direct product rule. This rule would prevent the export of goods to any country if they are manufactured using a certain percentage of U.S. intellectual property components, thereby affecting allies that continue to supply chipmaking tools and equipment to China.