South Korea is one of the few economies globally experiencing a productivity boost from artificial intelligence, though Bank of America analysts warn that rising U.S.-China tensions over semiconductor chips could hinder this growth.
According to a report from Bank of America Global Research, the semiconductor sector is crucial for South Korea, accounting for 17% of its exports. The country has been a primary beneficiary of the AI surge, with semiconductor exports rising over 50% year-over-year. Analysts project that South Korea’s significant investments in AI research and development, combined with an increasing number of AI-related patents, will further enhance its AI adoption.
However, the analysts caution that escalating geopolitical tensions could negatively impact the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China. Despite South Korea diversifying its chip exports beyond China to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being comparable.
If U.S.-China tensions worsen and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports. Furthermore, South Korean chip manufacturers rely on China for various components and machinery necessary for chip production. Therefore, any disruption in the supply chain could complicate the acquisition of essential tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limit exports of equipment and technology needed for producing specific types of memory chips and advanced logic chips to China. South Korean officials are contemplating this request, considering the potential impact on major firms like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
At the same time, the Biden administration is reportedly evaluating the implementation of export controls under the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of goods to any country if they contain a certain percentage of U.S. intellectual property.