South Korea stands out as one of the few economies globally experiencing productivity growth driven by artificial intelligence. However, analysts from Bank of America caution that escalating U.S.-China tensions over semiconductor technology may threaten this growth.
According to a report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports. The report indicates that the country has emerged as the largest beneficiary of the AI surge, with exports increasing by over 50% year-over-year. Experts believe that South Korea’s substantial investments in AI research and development, alongside an increasing number of AI-related patents, will strengthen its position in AI adoption in the long run.
Despite this positive outlook, analysts express concerns that geopolitical instability could impact the semiconductor supply chain—particularly due to rising tensions between the U.S. and China. Although South Korea has worked to diversify its semiconductor exports from China to other regions, more than 30% of its chip exports in 2023 were directed towards China and Hong Kong. Exports to the United States were approximately on par with those figures.
Bank of America analysts warn that if geopolitical frictions intensify and the U.S. enforces additional trade restrictions on the export of advanced or AI-related chips to China, it could severely impact South Korea’s semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment used in chip production. Any disruption to the supply chain stemming from geopolitical conflict could hinder these companies’ access to crucial production tools.
The U.S. has reportedly requested that South Korea impose restrictions on exports of equipment and technology used in the production of memory chips and advanced logic chips, particularly those surpassing 14-nanometer and 18-nanometer technologies. South Korean authorities are deliberating this request due to potential repercussions for key firms, such as Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is reportedly contemplating applying an export control known as the foreign direct product rule on allied nations that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any product to any country if it incorporates a specific percentage of U.S. intellectual property components.