South Korea is one of the few economies globally experiencing a productivity boost from artificial intelligence, according to analysts at Bank of America. However, escalating tensions between the U.S. and China regarding semiconductors pose a potential threat to this growth.
In a report from Bank of America Global Research, it was highlighted that the semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI boom, with a year-over-year increase in exports exceeding 50%. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rise in AI-related patents, will enhance its position in AI adoption over time.
Nonetheless, the analysts cautioned that geopolitical tensions could impact the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China. While South Korea has been working to diversify its chip exports away from China, data shows that over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being similar.
The report noted that if tensions were to escalate and the U.S. imposed more trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for some essential components and equipment needed for chip production. Disruptions in supply chains caused by geopolitical tensions could strain the ability of South Korean companies to obtain the necessary tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology essential for producing memory chips and advanced logic chips to China. South Korean officials are reportedly considering this request due to the potential consequences for major firms, such as Samsung and SK Hynix, which have significant operations in China—its largest trading partner.
Moreover, the Biden administration is reportedly contemplating the application of an export control known as the foreign direct product rule on allies that continue to sell chipmaking tools and equipment to China. This regulation would prohibit the export of any goods to any country if they are manufactured using a specific percentage of U.S. intellectual property components.