Bank of America analysts have highlighted South Korea as one of the few economies benefiting from a productivity upturn linked to artificial intelligence. However, they caution that rising tensions between the U.S. and China over semiconductor supply could threaten this growth.
According to a report by Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, making the country the largest beneficiary of the AI surge, with exports increasing by over 50% year-over-year. The report notes that South Korea’s substantial investments in AI research and development, coupled with a growing number of AI-related patents, are likely to enhance its AI adoption and market position in the long run.
Despite these advantages, analysts warn that geopolitical instability may disrupt the semiconductor supply chain. They specifically pointed to the ongoing tensions between the U.S. and China, which could pose risks for South Korea’s AI advancement. Although South Korea has begun diversifying its chip exports away from China, over 30% of its chip exports in 2023 went to China and Hong Kong, with exports to the U.S. being about the same amount.
Bank of America analysts noted that if geopolitical frictions escalate, particularly if the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Additionally, South Korean chip makers rely on China for certain components and equipment essential for chip manufacturing. Any disruptions in the supply chain due to heightened tensions could hinder these companies’ ability to acquire the necessary tools for production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of critical equipment and technology for manufacturing memory chips and advanced logic chips, specifically those that are more advanced than 14-nanometer and DRAM memory chips over 18-nanometer. South Korean officials are reportedly assessing the U.S. request, mindful of the potential effects on major firms like Samsung and SK Hynix, which have significant operations in China.
In parallel, the Biden administration is contemplating the use of export controls known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would restrict the export of goods if they are produced using a certain percentage of U.S. intellectual property.