South Korea is one of the few economies globally experiencing a surge in productivity thanks to artificial intelligence, but analysts from Bank of America have warned that U.S.-China tensions related to semiconductors may hinder its growth.
According to a report from Bank of America Global Research, the semiconductor industry constitutes 17% of South Korea’s exports, and the country has reaped significant benefits from the AI boom, with exports increasing by over 50% compared to the previous year. Analysts believe that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its position in AI adoption over time.
However, potential geopolitical strains, particularly the rising tensions between the U.S. and China, could impact the semiconductor supply chain, thereby posing challenges to AI growth in South Korea. Despite the country diversifying its chip exports away from China, over 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. at a similar level.
Bank of America analysts cautioned 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 challenge South Korea’s memory semiconductor market.
Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Disruption in the supply chain due to escalating tensions could impede South Korean companies’ ability to secure the necessary tools for chip production.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology for manufacturing memory chips and advanced logic chips, specifically those with capabilities beyond 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are considering this request due to the potential impact on major firms, including Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Meanwhile, the Biden administration is reportedly contemplating the use of an export control called the foreign direct product rule to regulate allies that continue providing chipmaking tools and equipment to China. This rule would restrict the export of any good to any country if it contains a certain percentage of U.S. intellectual property components.