South Korea stands out as one of the few economies benefiting from a productivity increase driven by artificial intelligence, but analysts from Bank of America warn that U.S.-China tensions surrounding semiconductor technology could hinder its growth.
Currently, the semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a key player in the AI market, experiencing a year-over-year export rise exceeding 50%. Analysts expect that South Korea’s substantial investment in AI research and development, alongside a growing number of AI patents, will further bolster its position in the adoption of AI technologies.
Nevertheless, concerns about geopolitical tensions potentially threatening the semiconductor supply chain persist, particularly in light of the escalating rivalry between the United States and China. Although South Korea has been working to diversify its chip exports beyond China, over 30% of its chip exports were still directed to China and Hong Kong in 2023, with the United States receiving a similar proportion.
Bank of America analysts caution that further escalation in geopolitical tensions, particularly if the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, could have a significant negative impact on South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for specific components and equipment needed in semiconductor production. Disruptions in the supply chain due to geopolitical conflicts could complicate the procurement of essential tools for chip manufacturing.
In a related development, the U.S. has reportedly urged South Korea to limit exports of equipment and technology used for producing memory and advanced logic chips to China. South Korean authorities are reportedly considering this request, mindful of the potential impact on major corporations such as Samsung and SK Hynix, which operate extensively within China, its largest trading partner.
Furthermore, the Biden administration is exploring the application of an export control measure known as the foreign direct product rule, targeting allied nations that continue to supply chip-making tools and technologies to China. This regulation prohibits the export of any product manufactured with a specified percentage of U.S. intellectual property to any nation.