South Korea stands out as one of the few economies benefiting from a productivity increase attributed to artificial intelligence. However, Bank of America analysts highlight that escalating tensions between the U.S. and China regarding semiconductors could pose a threat to this growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports and has seen substantial growth, with AI-driven exports rising over 50% year-over-year. The analysts believe that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, could enhance its position in AI adoption in the long run.
Nonetheless, the report warns that potential geopolitical tensions may impact the semiconductor supply chain. The ongoing friction between the U.S. and China is particularly concerning, as it presents challenges for AI expansion in South Korea. While the country has made efforts to shift its chip exports away from China to other regions, China and Hong Kong accounted for over 30% of South Korea’s chip exports in 2023, with exports to the U.S. being similarly substantial.
The analysts noted that if geopolitical frictions intensify and the U.S. were to impose further trade restrictions on advanced or AI-associated chip exports to China, it could significantly affect South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for essential chipmaking components and machinery, meaning that any supply chain disruptions could hinder their ability to produce chips effectively.
The U.S. has reportedly urged South Korea to limit exports to China of technology and equipment used in the manufacture of memory and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are currently considering this request in light of its potential impact on major national firms like Samsung and SK Hynix, both of which have significant operations in China—South Korea’s largest trading partner.
In parallel, the Biden administration is contemplating the application of a foreign direct product rule, aimed at allies that continue to provide chipmaking tools and equipment to China. This regulation would prohibit the export of certain goods to any nation if they incorporate a specified amount of U.S. intellectual property.