South Korea is experiencing a notable productivity increase driven by artificial intelligence, making it one of the few economies globally with this benefit. However, analysts from Bank of America highlight that growing tensions between the U.S. and China regarding semiconductors could pose a threat to South Korea’s growth trajectory.
A report from Bank of America Global Research indicates that the semiconductor sector constitutes 17% of South Korea’s exports, and the nation is reaping the rewards of the AI surge, witnessing over a 50% year-over-year increase in exports. The report emphasizes that the country’s substantial investments in AI research and development, coupled with an increasing number of AI-related patents, are likely to enhance its position in AI deployment in the long run.
Conversely, the analysts caution that potential geopolitical tensions may adversely affect the semiconductor supply chain, particularly stemming from the U.S.-China rivalry, which could hinder AI progress in South Korea. Despite diversifying chip exports to various regions, more than 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with a similar share going to the U.S.
Bank of America analysts warned that if geopolitical strains escalate and the U.S. imposes tighter trade restrictions on advanced or AI-related chip exports to China, this could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Any disruptions in the supply chain due to rising tensions could hinder the ability of South Korean companies to obtain necessary production tools.
Reports suggest that the U.S. has urged South Korea to limit exports to China of memory chip and advanced logic chip manufacturing equipment, specifically targeting chips more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are reportedly deliberating the U.S. request, considering the potential impact on major South Korean corporations, such as Samsung and SK Hynix, which have significant operations in China, the nation’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating enforcing export controls known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of products to any nation if they incorporate a designated percentage of U.S. intellectual property.