South Korea is experiencing a productivity increase linked to artificial intelligence, making it one of the few economies benefiting from this technology. However, Bank of America analysts warn that rising tensions between the U.S. and China over semiconductor chips may pose challenges to South Korea’s growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s total exports, which have surged more than 50% year-over-year due to the AI boom. Analysts believe that South Korea’s significant investment in AI research and development, coupled with an increasing number of AI-related patents, will strengthen its position in AI adoption in the long run.
Nevertheless, the analysts caution that potential geopolitical conflicts could impact the supply chain for semiconductors, particularly due to the intensifying U.S.-China relations. Despite South Korea’s efforts to diversify its chip exports beyond China, the report indicates that over 30% of its chip exports were directed to China and Hong Kong in 2023, with a similar proportion going to the United States.
If geopolitical tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, Bank of America analysts warn this could severely affect South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production, meaning any supply chain disruptions could hinder their operations.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used in fabricating memory chips and advanced logic chips, particularly those with technology finer than 14-nanometer and DRAM chips exceeding 18-nanometer. South Korean authorities are reportedly considering this request, mindful of the potential impact on major firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
In parallel, the Biden administration is contemplating utilizing an export control mechanism known as the foreign direct product rule on allies that supply chipmaking tools and equipment to China. This rule prohibits the export of any goods to any nation if they are produced with a specific percentage of U.S. intellectual property.