Bank of America analysts reported that South Korea is one of the few economies experiencing increased productivity thanks to artificial intelligence. However, ongoing tensions between the U.S. and China concerning semiconductors may pose risks to South Korea’s growth.
According to the report, the semiconductor sector comprises 17% of South Korea’s exports, making it a significant contributor to the economy. The country has seen over a 50% increase in exports year-over-year, positioning it as the largest beneficiary of the AI boom. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its status in AI adoption in the future.
Nonetheless, the report warns that geopolitical issues, particularly the escalating tensions between the U.S. and China, could impact the semiconductor supply chain. Despite diversifying chip exports away from China, over 30% of South Korea’s chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being similar.
Analysts cautioned that if U.S.-China tensions worsen and the U.S. imposes additional trade restrictions on the export of advanced or AI-related chips to China, it could seriously affect South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for various component parts and manufacturing equipment. Consequently, any disruption in supply chains due to geopolitical tensions could hinder their ability to produce chips.
Reports suggest that the U.S. has requested South Korea to limit its exports to China of equipment and technology necessary for manufacturing advanced memory and logic chips. South Korean officials are reportedly considering this request, taking into account potential impacts on major firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is contemplating the use of an export control mechanism known as the foreign direct product rule. This rule would prevent the export of goods produced with a certain threshold of U.S. intellectual property components to any country, impacting allies that continue to supply chipmaking tools to China.