South Korea is experiencing a rare increase in productivity due to artificial intelligence, but analysts from Bank of America have warned that escalating tensions between the U.S. and China over semiconductor chips could impact its growth. According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, and the nation has significantly benefited from the AI surge, with exports rising over 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with a growing portfolio of AI-related patents, will enhance its role in AI adoption.
However, the report also indicated that potential geopolitical tensions could negatively affect the semiconductor supply chain, particularly due to the increasing friction between the U.S. and China. Despite diversifying chip exports beyond China, over 30% of South Korea’s chip exports still went to China and Hong Kong in 2023, with a similar amount directed to the U.S.
Bank of America analysts cautioned that if geopolitical tensions worsen and the U.S. imposes further trade restrictions on advanced or 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 various chipmaking components and equipment, meaning supply chain disruptions could hinder the production of chips in South Korea.
The U.S. has reportedly requested that South Korea restrict exports to China of equipment and technology used for manufacturing memory and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating this request due to the possible implications for major South Korean companies like Samsung and SK Hynix, which have operations in China, its largest trading partner.
In related developments, the Biden administration is evaluating an export control measure known as the foreign direct product rule, which would apply to allies that continue supplying chipmaking tools and equipment to China. This rule would prohibit the export of any goods manufactured using a specified percentage of U.S. intellectual property.