Bank of America analysts have noted that South Korea is among the few economies experiencing a productivity boost from artificial intelligence (AI). However, they also highlighted that escalating tensions between the U.S. and China over semiconductor issues may pose a challenge to South Korea’s growth.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, and the nation has been the biggest beneficiary of the AI surge, with exports increasing by over 50% year-on-year. Analysts predict that South Korea’s substantial investments in AI research and development, paired with an increasing number of AI-related patents, will enhance its status in AI adoption.
Nonetheless, potential geopolitical tensions might negatively impact the semiconductor supply chain, particularly with the growing friction between the U.S. and China. The report states that while South Korea has diversified its chip exports away from China, over 30% of its semiconductor exports in 2023 still went to China and Hong Kong, with exports to the U.S. being at a similar level.
The analysts warned that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment crucial for chip production. Any disruptions in the supply chain due to heightened tensions would make it more challenging for these firms to obtain the necessary tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory and advanced logic chips. South Korean officials are reportedly considering this request due to potential impacts on major corporations like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In addition, the Biden administration is said to be contemplating employing an export control policy known as the foreign direct product rule against allies who continue providing chipmaking equipment and tools to China. This rule would prohibit the export of any product manufactured with a certain percentage of U.S. intellectual property components to other countries.