South Korea is experiencing a productivity increase driven by artificial intelligence, making it one of the few economies in the world to do so. However, Bank of America analysts caution that rising tensions between the U.S. and China regarding semiconductors could hinder this growth.
The semiconductor sector is vital for South Korea, constituting 17% of its exports. A report from Bank of America Global Research indicates that the nation has reaped significant benefits from the AI surge, with exports increasing by more than 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and development and a rising number of AI-related patents will continue to enhance its AI capabilities in the long run.
Despite these positives, the analysts warn that geopolitical risks could impact the semiconductor supply chain, particularly due to escalating U.S.-China tensions. While South Korea has started to diversify its chip exports beyond China, the report reveals that China and Hong Kong collectively accounted for over 30% of its chip exports in 2023, with exports to the U.S. being roughly comparable.
The analysts pointed out that if U.S.-China tensions worsen and the U.S. enforces stricter trade regulations on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chipmakers rely on China for certain components and equipment necessary for chip production. Disruptions to the supply chain due to geopolitical tensions could complicate their access to essential manufacturing tools.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology used in producing memory chips and advanced logic chips, particularly those exceeding 14-nanometer processes and DRAM memory chips over 18-nanometer. South Korean authorities are contemplating this request, considering potential impacts on major local companies like Samsung and SK Hynix, both of which have significant operations in China, South Korea’s largest trading partner.
In the meantime, the Biden administration is evaluating the possibility of implementing an export control measure known as the foreign direct product rule for allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any goods to any country if they contain a certain percentage of U.S. intellectual property.