South Korea is experiencing a notable productivity surge driven by artificial intelligence, positioning it uniquely among global economies. However, Bank of America analysts warn that escalating tensions between the U.S. and China over semiconductor issues could pose significant challenges to this growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports. The country has emerged as a leading beneficiary of the AI surge, with exports increasing over 50% year-on-year. Analysts project that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its capability in AI adoption in the long run.
Despite this promising outlook, the analysts caution that geopolitical tensions could impact the supply chain for semiconductors, especially as relations between the U.S. and China become strained. Although South Korea has sought to diversify its chip exports beyond China, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, which is comparable to exports sent to the U.S.
Bank of America analysts highlight that if U.S.-China tensions escalate and further trade restrictions are imposed on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and manufacturing equipment. Disruption in this supply chain could hinder their ability to produce chips effectively.
The U.S. has asked South Korea to limit exports to China of specific equipment and technology necessary for manufacturing memory and advanced logic chips. South Korean authorities are reportedly evaluating this request due to potential consequences for major domestic firms like Samsung and SK Hynix, which have substantial operations in China, their largest trading partner.
Additionally, the Biden administration is contemplating implementing the foreign direct product rule on ally nations that continue to supply China with chipmaking technology and equipment. This rule would prevent the export of goods produced with a certain percentage of U.S. intellectual property to any country.