South Korea stands out as one of the few economies benefiting from a surge in productivity driven by artificial intelligence. However, analysts from Bank of America have warned that escalating tensions between the U.S. and China regarding semiconductor technology may pose risks to this growth.
The semiconductor sector constitutes 17% of South Korea’s exports, with the nation experiencing a remarkable boost in AI-related exports, soaring over 50% year-over-year, as highlighted in a recent report from Bank of America Global Research. Analysts project that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will enhance the country’s position in AI adoption in the long run.
Nevertheless, the report cautions that geopolitical tensions could have adverse effects on the semiconductor supply chain. The ongoing discord between the U.S. and China remains a particular concern. While South Korea has made efforts to diversify its chip exports away from China, more than 30% of its semiconductor exports were still directed towards China and Hong Kong in 2023, with a similar proportion going to the U.S.
Should tensions escalate further and the U.S. implement additional trade restrictions on advanced or AI-related chip exports to China, it could jeopardize South Korea’s memory semiconductor exports, the analysts noted.
Moreover, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Disruptions in the supply chain due to geopolitical conflicts could complicate the procurement of these essential tools for South Korean firms.
In light of these developments, the U.S. government has reportedly urged South Korea to limit exports of equipment and technology utilized in the production of memory and advanced logic chips to China. South Korean officials are carefully considering the U.S. request due to potential impacts on major corporations like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control measure known as the foreign direct product rule aimed at allies that continue to supply semiconductor manufacturing tools to China. This proposed rule would prohibit the export of goods produced with a specified percentage of U.S. intellectual property to any nation.