South Korea stands out as one of the few economies experiencing a productivity boost from artificial intelligence, but Bank of America analysts warn that escalating U.S.-China tensions over semiconductors may pose challenges to this growth.
According to a report from Bank of America Global Research, the semiconductor sector is crucial for South Korea, comprising 17% of its exports. The nation has emerged as the biggest beneficiary of the AI boom, witnessing a more than 50% increase in exports year-over-year. Analysts predict that South Korea’s substantial investments in AI research and development, along with a growing portfolio of AI-related patents, will enhance its status in AI adoption in the long run.
However, potential geopolitical issues could impact the semiconductor supply chain, particularly due to the intensifying rivalry between the U.S. and China. While South Korea has made efforts to diversify its chip exports away from China to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, which is comparable to its exports to the U.S.
Analysts from Bank of America cautioned that if geopolitical tensions worsen and the U.S. enforces more trade restrictions on advanced or AI-related chip exports to China, it could significantly hinder South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for various components and equipment essential for chip production. Any disruption in the supply chain due to rising tensions could severely hinder these manufacturers’ ability to acquire the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology critical for producing memory chips and advanced logic chips to China, specifically those exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request, weighing the potential repercussions on major companies like Samsung and SK Hynix that have operations in China, which remains their largest trading partner.
Additionally, the Biden administration is contemplating implementing the foreign direct product rule on allies who continue to supply chipmaking tools and equipment to China. This rule would prevent the export of goods to any nation if they are produced using a certain percentage of U.S. intellectual property components.