South Korea stands out as one of the few economies globally experiencing a productivity increase due to artificial intelligence. However, analysts from Bank of America warn that escalating tensions between the U.S. and China over semiconductors could hinder its growth.
A recent Bank of America Global Research report highlighted that the semiconductor sector constitutes 17% of South Korea’s exports, making the country a major beneficiary of the ongoing AI boom, with exports surging by over 50% year-on-year. Analysts believe that South Korea’s significant investments in AI research and development, alongside a rising number of related patents, will enhance its AI adoption in the long run.
Nonetheless, potential geopolitical conflicts could impact the semiconductor supply chain, particularly amid the intensifying U.S.-China disputes. Despite South Korea’s efforts to diversify its chip exports away from China, the report indicated that over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with exports to the U.S. being roughly equivalent.
Should geopolitical tensions escalate, especially if the U.S. implements stricter trade restrictions on the export of advanced or AI-related chips to China, analysts warn that it could severely disrupt South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Any disruptions stemming from these tensions could hinder South Korean companies from acquiring essential tools for manufacturing chips.
The U.S. has reportedly urged South Korea to limit exports to China of technologies and equipment used for producing memory chips and advanced logic chips that exceed specific technological thresholds. South Korean officials are currently evaluating the request due to concerns about the potential impact on major firms like Samsung and SK Hynix, which have significant operations in China, its primary trading partner.
In addition, the Biden administration is contemplating the application of an export control known as the foreign direct product rule on allied nations that continue supplying chipmaking tools and technology to China. This rule prohibits the export of any good made with a certain proportion of U.S. intellectual property from being sent to any nation.