South Korea is among the few economies globally experiencing a productivity surge attributed to artificial intelligence. However, analysts at Bank of America warn that escalating tensions between the U.S. and China regarding semiconductor technology may pose a risk to South Korea’s growth prospects.
The semiconductor sector is crucial for South Korea, comprising 17% of its exports. A report from Bank of America Global Research highlights that the country has significantly benefited from the AI boom, with exports increasing by over 50% year-over-year. Analysts are optimistic about South Korea’s substantial investments in AI research and development, as well as its rising number of AI-related patents, which are expected to enhance its AI adoption in the long run.
Nevertheless, the report points out that geopolitical tensions could adversely affect the semiconductor supply chain, particularly concerning the fraught relations between the U.S. and China. Despite South Korea’s efforts to shift chip exports from China to other regions, over 30% of its semiconductor exports in 2023 still went to China and Hong Kong, with a similar percentage going to the U.S.
The analysts from Bank of America cautioned that if the U.S. escalates geopolitical tensions by imposing stricter trade restrictions on exports of advanced and AI-related semiconductors to China, it could severely impact South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for vital components and equipment needed for chip production. Consequently, any disruption in supply chains due to rising tensions could hamper their ability to secure the necessary tools for manufacturing semiconductors.
Reports suggest that the U.S. has requested South Korea to limit exports of equipment and technology essential for producing memory chips and advanced logic chips for the Chinese market. South Korean officials are considering this request, mindful of potential consequences for major local companies like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
In addition, the Biden administration is reportedly contemplating the implementation of the foreign direct product rule on allies that continue to provide chipmaking tools and equipment to China. This rule would prevent any goods from being exported if they are manufactured using a certain percentage of U.S. intellectual property components.