South Korea stands out as one of the few global economies experiencing a productivity increase driven by artificial intelligence. However, analysts from Bank of America warn that escalating tensions between the U.S. and China regarding semiconductor technologies could pose a significant challenge to this growth.
According to a report from Bank of America Global Research, the semiconductor sector is a vital component of South Korea’s economy, comprising 17% of its exports. The report highlights that South Korea has reaped substantial benefits from the AI surge, with exports rising by more than 50% year-over-year. Long-term projections indicate that the nation’s substantial investments in AI research and development, along with an increasing volume of AI-related patents, will enhance its AI adoption capabilities.
Despite these optimistic trends, analysts caution that geopolitical conflicts could impact the semiconductor supply chain, particularly given the worsening relationship between the U.S. and China. While South Korea has taken steps to diversify its chip exports away from China, the report notes that over 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being roughly equivalent.
Bank of America analysts assert that if geopolitical tensions worsen and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, the memory semiconductor export sector in South Korea could be severely affected.
Additionally, South Korean semiconductor manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain due to heightened tensions could hinder these firms’ access to essential production tools.
In response to the situation, the U.S. has reportedly requested that South Korea limit exports of equipment and technologies used in the fabrication of memory chips and advanced logic chips, particularly those exceeding 14-nanometer logic chips and DRAM memory chips classified beyond 18-nanometer. South Korean authorities are contemplating this request, considering the potential impact on major companies like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.
Meanwhile, the Biden administration is reportedly exploring the implementation of an export control mechanism known as the foreign direct product rule. This regulation is aimed at allies that continue to supply chipmaking tools and equipment to China, stipulating that no goods can be exported to any nation if they are manufactured with a specific proportion of U.S. intellectual property components.