South Korea stands out among global economies as one that is experiencing a productivity surge driven by artificial intelligence. However, analysts from Bank of America warn that rising tensions between the U.S. and China regarding semiconductor technology could pose risks to this growth.
The semiconductor sector is crucial for South Korea, making up 17% of the nation’s exports. According to a report from Bank of America Global Research, South Korea has emerged as a primary beneficiary of the AI boom, with semiconductor exports increasing by over 50% compared to the previous year. Analysts expect that the country’s significant investments in AI research and development, along with a rise in AI-related patents, will strengthen its position in AI adoption in the long run.
Despite these advantages, the report cautions that geopolitical tensions could impact the semiconductor supply chain. The ongoing strain between the U.S. and China represents a particular challenge for South Korea’s AI growth. While the country has worked to diversify its chip exports away from China, over 30% of its semiconductor exports still went to China and Hong Kong in 2023, with a similar percentage destined for the U.S.
Bank of America analysts noted that if geopolitical tensions worsen and the U.S. enacts further trade restrictions on the export of advanced or AI-related chips to China, it could significantly hinder South Korea’s semiconductor industry.
Additionally, South Korean chip manufacturers rely on China for various components and equipment needed for chip production. Any disruptions in this supply chain due to rising tensions would complicate the ability of South Korean companies to obtain the necessary tools for manufacturing.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology essential for the production of memory chips and advanced logic chips. South Korean officials are considering this request, mindful of the potential impact on major domestic firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In a related development, the Biden administration is contemplating the use of an export control measure known as the foreign direct product rule, targeting allied nations that continue to supply China with chipmaking tools and equipment. This regulation would restrict the export of any product to any country that incorporates a set percentage of U.S. intellectual property.