South Korea is one of the few economies globally experiencing a productivity increase attributed to artificial intelligence (AI). However, analysts at Bank of America warn that escalating U.S.-China tensions regarding semiconductor chips may pose a risk to this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation has been a significant beneficiary of the AI surge, with export levels rising by over 50% year-on-year, as noted in a recent report from Bank of America Global Research. Analysts are optimistic that South Korea’s substantial investments in AI research and development, alongside an increasing number of AI-related patents, will enhance its standing in AI usage in the long run.
Despite this positive outlook, the analysts cautioned that geopolitical tensions could impact the semiconductor supply chain, particularly due to rising conflicts between the U.S. and China. Although South Korea has made efforts to diversify its chip exports away from China, over 30% of its chip exports in 2023 were still directed towards China and Hong Kong, with a similar proportion going to the U.S.
Should tensions rise further, leading the U.S. to impose additional trade restrictions on exports of advanced or AI-related chips to China, it could have a detrimental effect on South Korea’s memory semiconductor exports, the analysts emphasized.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Consequently, any disruption to the supply chain caused by geopolitical conflicts could hinder these manufacturers’ ability to procure the required tools for producing chips.
Reports indicate that the U.S. has urged South Korea to limit exports of equipment and technology essential for the production of memory chips and advanced logic chips to China. South Korean officials are reportedly evaluating this request due to its potential impact on major domestic firms like Samsung and SK Hynix, both of which operate in China, South Korea’s largest trading partner.
In response to the situation, the Biden administration is considering implementing 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 prevent any goods from being exported if they contain a certain percentage of U.S. intellectual property.