South Korea stands out as one of the few economies globally experiencing a productivity surge due to artificial intelligence, but analysts at Bank of America warn that tensions between the U.S. and China over semiconductors could pose risks to its economic growth.
The semiconductor sector constitutes 17% of South Korea’s exports, and according to a Bank of America Global Research report, the nation has emerged as the largest beneficiary of the AI market, witnessing over a 50% rise in exports year-on-year. Analysts project that the country’s substantial investments in AI research and development, as well as the increasing number of AI-related patents, are set to enhance its position in AI integration further.
However, potential geopolitical strains, particularly the ongoing tensions between the U.S. and China, could jeopardize the semiconductor supply chain and hinder South Korea’s AI growth. Even though South Korea has diversified its chip exports beyond China, over 30% of its chip exports in 2023 were directed to China and Hong Kong, with a similar proportion going to the U.S.
Bank of America analysts caution that escalating geopolitical conflicts could lead to the U.S. imposing further trade restrictions on advanced or AI-related chip exports to China, which would significantly impact South Korean memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Disruptions to this supply chain could hinder their ability to obtain the necessary tools for chip production.
Reports indicate that the U.S. has requested South Korea to limit exports to China of specific equipment and technology for manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometer for logic and 18-nanometer for DRAM memory. South Korean officials are reportedly considering the U.S. request due to potential implications for major domestic firms like Samsung and SK Hynix, both of which have operations in China, its largest trading partner.
Meanwhile, the Biden administration is contemplating utilizing an export control known as the foreign direct product rule against allies that continue exporting chipmaking tools and equipment to China. This rule would prohibit the export of any product to any country manufactured with a defined percentage of U.S. intellectual property components.