South Korea is one of the few economies benefiting from a productivity increase driven by artificial intelligence, although rising tensions between the U.S. and China regarding semiconductor technology could pose challenges to its economic growth, Bank of America analysts indicate.
The semiconductor sector represents 17% of South Korea’s exports, making it a significant contributor to the economy. According to a report from Bank of America Global Research, the nation has become the largest beneficiary of the AI boom, with exports soaring over 50% year-over-year. Analysts believe that South Korea’s considerable investments in AI research and development, along with an increasing number of AI-related patents, will enhance its capacity for AI adoption in the long run.
However, analysts also caution that geopolitical tensions may impact the semiconductor supply chain, particularly given the escalating conflicts between the U.S. and China. Despite efforts to diversify chip exports away from China, the report notes that China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with chip exports to the U.S. making up a similar share.
The analysts warn that if U.S.-China tensions escalate and the U.S. enforces additional trade restrictions on advanced or AI-related chip exports to China, it could significantly affect South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for vital chipmaking components and equipment. Any disruptions in the supply chain due to geopolitical tensions would hinder these firms’ ability to obtain the necessary tools for chip production.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used for manufacturing advanced memory and logic chips. South Korean officials are reportedly considering this request, weighing its implications for major South Korean companies like Samsung and SK Hynix, both of which have significant operations in China.
Concurrently, the Biden administration is contemplating the application of an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule could restrict the export of goods to any country if they are produced using a specific percentage of U.S. intellectual property components.