South Korea is experiencing a productivity surge attributed to artificial intelligence, positioning itself as one of the few economies benefiting from the AI boom. However, analysts from Bank of America have highlighted that rising tensions between the U.S. and China over semiconductor technology could pose challenges to South Korea’s growth.
The semiconductor sector is crucial for South Korea, constituting 17% of its exports. Bank of America Global Research noted that the nation has emerged as a key player in the AI landscape, with exports soaring over 50% year-on-year. Analysts predict that South Korea’s substantial investments in AI research and development, coupled with an increasing number of AI-related patents, will bolster its leadership in AI adoption in the long run.
Despite this positive outlook, analysts cautioned that geopolitical tensions could negatively impact the semiconductor supply chain. The ongoing friction between the U.S. and China is particularly concerning as it poses risks to AI growth in South Korea. Although the country has diversified its chip exports beyond China, over 30% of its semiconductor exports in 2023 still went to China and Hong Kong, with exports to the U.S. being comparable.
Bank of America analysts warned that if geopolitical hostilities escalate and the U.S. enforces further trade restrictions on advanced or AI-focused chip exports to China, it could severely harm South Korea’s memory semiconductor exports.
Moreover, South Korean chip producers rely on China for essential components and equipment needed for chip manufacturing. Any disruption to the supply chain caused by tensions could complicate the ability of South Korean companies to access the necessary tools for production.
The U.S. has reportedly urged South Korea to limit its exports of equipment and technology used in the production of memory and advanced logic chips to China. South Korean officials are considering the U.S. request carefully, given the potential impact on major domestic firms like Samsung and SK Hynix, which have significant operations in China.
In addition, the Biden administration is contemplating implementing an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking tools to China. This rule would prohibit the export of any goods to any country if those goods contain a certain level of U.S. intellectual property.