South Korea is among the few economies globally benefiting from a productivity increase fueled by artificial intelligence, yet analysts from Bank of America caution that escalating U.S.-China tensions over semiconductor supplies could pose risks to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI boom, with exports rising by over 50% year-on-year, according to a report from Bank of America Global Research. In the long run, the analysts believe that South Korea’s substantial investments in AI research and development and an increasing number of AI-related patents will enhance its position in AI adoption.
Despite this positive outlook, analysts warned that potential geopolitical conflicts could impact the semiconductor supply chain, particularly the rising friction between the U.S. and China, which could hinder AI growth in South Korea. Although the nation has been diversifying its chip exports beyond China, the report notes that over 30% of these exports still went to China and Hong Kong in 2023, with an equal share directed towards the U.S.
Bank of America analysts stated that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on exports of advanced or AI-related chips to China, it could considerably harm memory semiconductor exports from Korea.
Additionally, South Korean manufacturers rely on China for certain components and equipment needed for chip production. Should tensions disrupt supply chains, South Korean companies may face challenges in obtaining essential tools for semiconductor fabrication.
Reports indicate that the U.S. has urged South Korea to limit exports to China of equipment and technologies used in the production of memory and advanced logic chips, especially those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean authorities are reportedly considering this request in light of potential impacts on major domestic companies like Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
In the backdrop, the Biden administration is said to be contemplating the implementation of an export control measure known as the foreign direct product rule, aimed at allies that continue to sell chipmaking tools and equipment to China. This regulation would prevent the export of any products manufactured with a specific percentage of U.S. intellectual property to any country.