South Korea is emerging as one of the few economies globally experiencing a productivity increase from artificial intelligence. However, analysts from Bank of America warn that rising tensions between the U.S. and China over semiconductor chips could pose challenges to the country’s growth trajectory.
According to a report from Bank of America Global Research, the semiconductor sector comprises 17% of South Korea’s exports. The nation has been a major benefactor of the AI surge, with exports rising more than 50% year-over-year. Analysts suggest that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, are likely to enhance its capabilities in AI adoption in the long run.
Despite these positive indicators, analysts expressed concerns that potential geopolitical conflicts could disrupt the semiconductor supply chain, particularly amid escalating U.S.-China tensions. While South Korea has diversified its chip exports away from China to other regions, approximately 30% of its chip exports still went to China and Hong Kong in 2023. Exports to the U.S. made up a similar proportion.
Bank of America analysts noted that if geopolitical tensions worsen and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could have a detrimental impact on South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Any disruptions in the supply chain due to rising tensions could hinder South Korean companies in acquiring the essential tools for chip manufacturing.
The U.S. has reportedly requested that South Korea limits exports to China of equipment and technologies associated with memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are considering this request due to potential implications for major domestic firms like Samsung and SK Hynix, both of which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule, aimed at allied nations that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any product to any nation if it is produced using a specific percentage of U.S. intellectual property components.