South Korea stands out as one of the few economies globally experiencing a productivity increase driven by artificial intelligence. However, Bank of America analysts caution that escalating U.S.-China tensions concerning semiconductor technology could pose challenges to South Korea’s growth.
According to a recent Bank of America Global Research report, the semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as the largest beneficiary of the AI revolution, with exports soaring over 50% year-over-year. In the long run, analysts believe that South Korea’s significant investments in AI research and development, coupled with an increasing number of AI-related patents, will enhance its position in the AI sector.
Nevertheless, the analysts warn that ongoing geopolitical tensions may impact the semiconductor supply chain, particularly due to rising hostilities between the U.S. and China. Despite South Korea’s efforts to redirect its chip exports away from China towards other regions, more than 30% of its chip exports in 2023 still went to China and Hong Kong, with exports to the U.S. being comparable.
If geopolitical relations deteriorate further and the U.S. imposes more stringent trade restrictions on the export of advanced or AI-related chips to China, it could pose a serious threat to South Korea’s memory semiconductor exports, the analysts stated.
Additionally, South Korean chip manufacturers rely on China for certain components and machinery crucial for chip production. Supply chain disruptions due to heightened tensions may complicate access to the necessary equipment for South Korean firms to manufacture chips.
Reports indicate that the U.S. has requested South Korea to limit its exports to China of equipment and technology involved in producing memory and advanced logic chips. South Korean officials are reportedly assessing this request, considering its potential impact on major domestic companies like Samsung and SK Hynix, both of which have significant operations in China.
Meanwhile, the Biden administration is contemplating implementing an export control known as the foreign direct product rule, targeting allies that persist in supplying chipmaking tools and machinery to China. This rule would prevent the export of any goods to any nation if they contain a designated amount of U.S. intellectual property components in their manufacturing.