Bank of America analysts report that South Korea stands out as one of the few economies benefitting from a productivity surge driven by artificial intelligence. However, escalating tensions between the U.S. and China regarding semiconductor supply may pose challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a major beneficiary of the AI boom, with exports increasing by over 50% year-on-year. Analysts emphasize 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 capabilities in AI adoption over the long term.
Nonetheless, the report warns that geopolitical tensions could adversely impact the semiconductor supply chain, particularly due to worsening relations between the U.S. and China. Although South Korea has diversified its chip exports to regions outside China, over 30% of its chip exports were still directed to China and Hong Kong in 2023, with a similar percentage going to the U.S.
Bank of America analysts cautioned that if geopolitical tensions escalate and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could severely hurt South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various essential components and equipment for chip production. Any disruptions in this supply chain could impede their ability to produce chips.
The U.S. has reportedly urged South Korea to limit exports of chipmaking technologies and equipment to China, specifically targeting advanced logic chips and DRAM memory chips. South Korean officials are considering this request due to potential impacts on major companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
Meanwhile, the Biden administration is reportedly contemplating the application of an export control measure known as the foreign direct product rule on allies who continue to supply semiconductor manufacturing equipment to China. This rule would prevent the export of goods that incorporate a specific percentage of U.S. intellectual property components to any country.