South Korea is experiencing a notable productivity surge driven by artificial intelligence (AI), making it one of the few economies worldwide benefiting from this technology. However, analysts at Bank of America caution that escalating U.S.-China tensions regarding semiconductor chips could hinder its growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, and the nation has gained significantly from the AI boom, with exports rising over 50% year-over-year. 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 position in AI adoption in the long run.
Nonetheless, the report highlights that potential geopolitical conflicts could impact the semiconductor supply chain, particularly amid rising tensions between the U.S. and China. Although South Korea has worked to diversify its chip exports away from China, the report states that over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being approximately the same.
Bank of America analysts warn that if geopolitical strains worsen and the U.S. imposes stricter trade restrictions on advanced or AI-related chips destined for China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Consequently, any disruptions in this supply chain due to rising tensions would complicate the ability of South Korean firms to procure essential tools for chip production.
The U.S. has reportedly requested that South Korea limit the export of equipment and technology for producing memory and advanced logic chips to China. South Korean officials are considering this request, aware of the potential repercussions for major corporations such as Samsung and SK Hynix, which have operations in China, its largest trading partner.
Simultaneously, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule on allies that continue supplying chipmaking equipment and tools to China. This rule would prohibit the export of goods produced with a certain percentage of U.S. intellectual property to any country.