South Korea stands out as one of the few economies experiencing a productivity boost due to artificial intelligence, but Bank of America analysts warn that escalating tensions between the U.S. and China over semiconductors could hinder its growth potential.
According to a Global Research report from Bank of America, the semiconductor sector constitutes 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports soaring over 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will further enhance its position in AI adoption moving forward.
However, the analysts highlight concerns that potential geopolitical conflicts could impact the semiconductor supply chain, particularly due to the growing friction between the U.S. and China. Despite efforts to diversify chip exports away from China, over 30% of South Korea’s semiconductor exports were directed to China and Hong Kong in 2023, with exports to the U.S. being comparable.
The report suggests that if geopolitical tensions escalate and the U.S. imposes additional trade restrictions on advanced or AI-related chips exported to China, it could significantly damage South Korea’s memory semiconductor exports.
South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruptions to the supply chain resulting from heightened tensions could complicate access for South Korean companies to the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit its exports of equipment and technology used in the manufacture of memory chips and advanced logic chips to China, specifically those more advanced than 14-nanometric logic chips and 18-nanometric DRAM memory chips. South Korean authorities are reportedly considering this request due to its potential impact on major domestic firms like Samsung and SK Hynix, which operate in China—its largest trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule, aimed at allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any country if those goods are made with a specific percentage of U.S. intellectual property.