South Korea is experiencing a rare productivity increase attributed to artificial intelligence, yet analysts from Bank of America warn that escalating U.S.-China tensions regarding semiconductor technology may pose challenges to the nation’s growth.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as a significant winner from the AI boom, with exports soaring over 50% year-on-year. The analysts maintain that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, are likely to strengthen its position in AI adoption further.
However, the potential for geopolitical strife is a concern, particularly the increasing friction between the U.S. and China, which could impact the semiconductor supply chain and, in turn, hinder AI growth in South Korea. Despite diversifying chip exports beyond China to other regions, over 30% of South Korea’s chip exports were directed to China and Hong Kong in 2023, with exports to the U.S. being comparable.
Bank of America analysts cautioned that if U.S.-China relations worsen and further trade restrictions are placed on exports of advanced or AI-related chips to China, it could have a detrimental effect on memory semiconductor exports from Korea.
Additionally, South Korean chip manufacturers rely on China for numerous chipmaking components and equipment. Consequently, any disruptions in these supply chains caused by geopolitical tensions could hinder South Korean firms’ ability to produce chips effectively.
The U.S. has reportedly requested that South Korea limit exports of equipment and technology essential for manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometer in complexity and DRAM memory chips beyond 18-nanometer technology. South Korean officials are reportedly evaluating this request due to potential implications for major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
At the same time, the Biden administration is contemplating implementing an export control measure known as the foreign direct product rule on allies that continue supplying chipmaking tools and equipment to China. This regulation would prohibit the export of any goods to any country if those goods are produced with a specified percentage of U.S. intellectual property components.