South Korea is experiencing one of the few productivity boosts in the world thanks to artificial intelligence, but analysts from Bank of America warn that rising tensions between the U.S. and China regarding semiconductor chips could hinder this growth.
According to a report from Bank of America Global Research, the semiconductor sector is critical to South Korea, accounting for 17% of its exports. The country has emerged as a significant beneficiary from the AI boom, with exports seeing over a 50% increase year-over-year. Analysts believe that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption over the long term.
However, analysts caution that potential geopolitical tensions may impact the semiconductor supply chain, especially amid ongoing conflicts between the U.S. and China. Although South Korea has diversified its chip exports beyond China, over 30% were still directed there in 2023, with a similar figure for exports to the U.S.
Bank of America analysts stated that if geopolitical tensions escalate and the U.S. enforces additional trade restrictions on AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for specific components and equipment essential for chip production. Disruptions in the supply chain due to heightened tensions could create challenges for these firms in acquiring the necessary tools for manufacturing.
In a related context, the United States has reportedly requested South Korea to limit exports to China of certain equipment and technologies utilized in the production of memory chips and advanced logic chips, particularly those beyond the 14-nanometer and 18-nanometer thresholds. South Korean officials are evaluating this request, considering its potential effects on major domestic companies like Samsung and SK Hynix, which maintain operations in China, South Korea’s largest trading partner.
Meanwhile, the Biden administration is reportedly examining the possibility of applying a foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would restrict the export of any goods that contain a certain percentage of U.S. intellectual property components, regardless of their destination.