Analysts from Bank of America have pointed out that South Korea is one of the few economies globally benefiting from increased productivity due to artificial intelligence. However, tensions between the U.S. and China over semiconductor technology could pose potential risks to this growth.
The semiconductor sector represents 17% of South Korea’s exports, with the nation reportedly being the top beneficiary of the AI surge, seeing a more than 50% increase in exports year-over-year, according to a Bank of America Global Research report. The long-term outlook suggests that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, are likely to enhance its role in AI adoption.
Nevertheless, analysts caution that geopolitical tensions could impact the semiconductor supply chain. The escalating friction between the U.S. and China could specifically challenge South Korea’s AI growth strategies. While South Korea has taken steps to diversify its chip exports beyond China, the report highlights that China and Hong Kong together accounted for over 30% of its chip exports in 2023, roughly equal to exports to the U.S.
Bank of America experts warned that if U.S.-China tensions worsen and the U.S. imposes stricter trade prohibitions on advanced chip exports to China, it could seriously affect South Korea’s semiconductor export market. Additionally, South Korean chip manufacturers rely on China for several essential chip-making components and equipment. Disruptions in supply chains caused by escalating tensions would complicate the ability of South Korean firms to procure the necessary tools for chip production.
The U.S. government has reportedly urged South Korea to limit exports of certain chip manufacturing technologies and equipment to China. This includes equipment related to memory chips and logic chips that exceed specific technology thresholds. South Korean officials are contemplating this request due to potential consequences for major companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is reportedly considering implementing an export control mechanism known as the foreign direct product rule. This rule would restrict exports to any country of goods manufactured using a certain percentage of U.S. intellectual property components, impacting allies that continue to sell chip-making tools and equipment to China.