South Korea is currently experiencing a boost in productivity attributed to artificial intelligence, positioning it as one of the few economies benefiting from this development. However, analysts from Bank of America warn that escalating tensions between the U.S. and China regarding semiconductor technology could hinder this growth.
The semiconductor sector is crucial for South Korea, constituting 17% of the nation’s exports. A recent report from Bank of America Global Research indicates that South Korea has greatly benefited from the AI surge, with semiconductor exports increasing by over 50% year-over-year. The report highlights that ongoing investments in AI research and development, along with a rise in AI-related patents, are expected to strengthen South Korea’s AI capabilities in the long run.
Nevertheless, the report cautions that geopolitical tensions might disrupt the semiconductor supply chain, particularly in light of the growing friction between the U.S. and China. While South Korea has managed to diversify its chip exports beyond China, more than 30% of its semiconductor exports still went to China and Hong Kong in 2023. Exports to the U.S. accounted for a similar percentage.
Bank of America analysts noted that should tensions between the U.S. and China escalate, particularly with the imposition of additional trade restrictions on advanced semiconductors, this could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip producers rely on China for various chipmaking components and equipment, making any disruption in the supply chain challenging for their production capabilities.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology essential for manufacturing advanced memory and logic chips. South Korean officials are reportedly considering this request, weighing its potential impact on major companies like Samsung and SK Hynix, which have significant operations in China.
Moreover, the Biden administration is contemplating applying an export control measure known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any products manufactured with a specific proportion of U.S. intellectual property to any nation.