South Korea stands out as one of the few economies reaping productivity benefits from artificial intelligence, but analysts from Bank of America warn that escalating U.S.-China tensions over semiconductor technology could hinder this growth.
According to a recent report from Bank of America Global Research, the semiconductor sector constitutes 17% of South Korea’s exports, and the country has emerged as a major beneficiary of the AI surge, with exports increasing by more than 50% year-over-year. The analysts predict that South Korea’s substantial investments in AI research and development and a growing portfolio of AI-related patents will enhance its position in AI adoption over the long term.
Nevertheless, the analysts cautioned that potential geopolitical conflicts could pose risks to the semiconductor supply chain, particularly amidst rising tensions between the U.S. and China. Although South Korea has been shifting its chip exports towards other regions to reduce reliance on China, the report noted that China and Hong Kong represented over 30% of its chip exports in 2023, with exports to the U.S. being similar.
The report further stated that an escalation in geopolitical tensions could lead the U.S. to impose additional trade restrictions on exports of advanced or AI-related chips to China, which could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers are reliant on China for certain components and equipment necessary for chip production. Disruptions in the supply chain could complicate South Korean firms’ access to critical tools for chip manufacturing.
The U.S. has reportedly urged South Korea to limit exports to China of technology and equipment utilized in the production of memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are considering the U.S. request, mindful of the potential impact on major domestic firms, such as Samsung and SK Hynix, that have significant operations in China, the country’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the application of export controls known as the foreign direct product rule against allied nations that continue supplying chipmaking tools and equipment to China. This rule would prevent the export of any goods to foreign countries if those goods are produced using a specific percentage of U.S. intellectual property components.