South Korea is experiencing a significant productivity boost from artificial intelligence, distinguishing itself as one of the few nations around the globe to benefit from this technological advance. However, Bank of America analysts caution that escalating tensions between the U.S. and China regarding semiconductor chips could present challenges to South Korea’s growth trajectory.
According to a recent report from Bank of America Global Research, the semiconductor sector is crucial for the South Korean economy, accounting for 17% of its total exports. The report indicates that South Korea has been a major beneficiary of the AI surge, witnessing over a 50% increase in exports year-over-year. Analysts are optimistic about the country’s future, noting that its substantial investments in AI research and development, along with a rising count of AI-related patents, will likely enhance its position in AI adoption on the global stage.
Conversely, the analysts warn that potential geopolitical tensions, particularly between the U.S. and China, could affect the semiconductor supply chain, which is essential for South Korea’s AI growth. Despite diversifying chip exports to other regions, China and Hong Kong still account for over 30% of South Korea’s chip exports in 2023, with similar figures for exports to the U.S.
The analysts highlighted that if political tensions escalate and the U.S. enforces stricter trade limitations on advanced or AI-related chip exports to China, it could substantially impact the memory semiconductor sector in Korea. Additionally, South Korean chip manufacturers rely on China for critical chipmaking components and equipment. Thus, any disruptions in the supply chain could hinder their production capabilities.
The U.S. is reportedly urging South Korea to limit exports of equipment and technology crucial for producing memory chips and advanced logic chips to China. South Korean officials are deliberating on this request, given the potential repercussions for major local firms like Samsung and SK Hynix, both operating in China, which is their largest trading partner.
Furthermore, the Biden administration is exploring the implementation of an export control mechanism known as the foreign direct product rule. This rule would prevent any goods from being exported to any country if they are manufactured with a specified percentage of U.S. intellectual property components, potentially increasing pressure on allies engaged in trade with China.
In conclusion, while South Korea’s advancements in AI and semiconductor exports present a tremendously positive outlook for its economy, the geopolitical landscape poses certain risks that must be carefully navigated. As the situation evolves, South Korea has the opportunity to leverage its technological investments and strengthen its international partnerships, ensuring a robust future despite external challenges.