South Korea is emerging as one of the few economies worldwide benefiting from productivity gains driven by artificial intelligence, but escalating tensions between the U.S. and China over semiconductor issues may pose risks to its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has become the largest winner from the AI surge, witnessing over a 50% increase in exports year-on-year, as stated in a Bank of America Global Research report. Analysts believe that South Korea’s significant investment in AI research and development, along with a rising number of AI-related patents, will enhance its AI adoption capabilities in the long run.
However, the analysts warned that geopolitical tensions could have negative effects on the semiconductor supply chain, particularly due to the ongoing friction between the U.S. and China. Although South Korea has managed to diversify its chip exports away from China to other regions, over 30% of its chip exports were still directed to China and Hong Kong in 2023, with a similar percentage going to the U.S.
Bank of America analysts noted that if geopolitical tensions escalate and the U.S. enacts additional trade restrictions on the export of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
South Korean chip manufacturers also rely on China for certain essential components and equipment needed for chip production. Any supply chain disruptions resulting from heightened tensions could hinder these companies’ ability to acquire the necessary tools for semiconductor manufacturing.
The U.S. has purportedly requested that South Korea limit exports to China of machinery and technology for memory chips and advanced logic chips, specifically those exceeding 14-nanometers in technology node for logic chips and beyond 18-nanometers for DRAM memory chips. South Korean authorities are reportedly considering this U.S. request, keeping in mind the potential impact on major domestic companies like Samsung and SK Hynix, which have significant operations in China—their largest trading partner.
Additionally, the Biden administration is reportedly contemplating the implementation of an export control known as the foreign direct product rule on allied nations that continue to supply chipmaking tools to China. This rule would prevent the export of any product to any country if it is produced using a defined proportion of U.S. intellectual property components.