South Korea is experiencing a unique productivity surge attributed to artificial intelligence, but analysts from Bank of America caution that rising U.S.-China tensions over semiconductor issues could hinder its economic growth.
The semiconductor sector is a critical component of South Korea’s economy, constituting 17% of its exports. According to a report from Bank of America Global Research, the nation has emerged as a leading beneficiary of the AI expansion, with exports increasing by 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 enhance its status in AI integration over the long term.
Despite these advantages, the analysts noted that escalating geopolitical tensions might impact the semiconductor supply chain. The ongoing friction between the U.S. and China could pose significant challenges to South Korea’s AI growth. Although South Korea has begun diversifying its semiconductor exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with similar levels directed to the U.S.
If geopolitical issues intensify and the U.S. enforces stricter trade regulations on advanced or AI-related chip exports to China, it could greatly affect South Korea’s memory chip exports, according to Bank of America analysts.
Additionally, South Korean chipmakers rely on China for various components and equipment essential for chip production. Any disruption in this supply chain due to rising tensions could complicate the ability of South Korean companies to obtain the necessary tools for manufacturing chips.
The U.S. has reportedly urged South Korea to limit exports of manufacturing equipment and technology to China, specifically targeting logic chips that exceed 14-nanometer specifications and DRAM memory chips over 18-nanometers. South Korean officials are considering the request in light of the potential impact on major companies like Samsung and SK Hynix, which have substantial operations in China, its most significant trading partner.
Simultaneously, the Biden administration is contemplating implementing an export control known as the foreign direct product rule, targeting allies that continue to sell chipmaking tools to China. This regulation would prohibit the export of any products manufactured using a specified percentage of U.S. intellectual property.