South Korea stands out as one of the few economies benefiting from an increase in productivity driven by artificial intelligence (AI). However, analysts from Bank of America caution that escalating tensions between the U.S. and China regarding semiconductor supplies could hinder this growth.
According to a report by Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, and the nation has become the largest beneficiary of the AI boom, with exports surging over 50% year-over-year. The report highlights that ongoing investments in AI research and development, along with a rising number of AI-related patents, position South Korea favorably for future advancements in AI adoption.
Despite these advantages, the potential for geopolitical tensions to disrupt semiconductor supply chains remains a significant concern, particularly due to the ongoing friction between the U.S. and China. Although South Korea has made efforts to diversify its chip exports beyond China, over 30% of its semiconductor exports in 2023 were still directed to China and Hong Kong, with a similar percentage going to the U.S.
Bank of America analysts warned that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports. Moreover, South Korean chip makers also rely on China for essential components and equipment for manufacturing. Disruptions in this supply chain could pose significant challenges for local companies in securing the necessary tools for production.
Reports indicate that the U.S. has asked South Korea to limit exports to China of technology and equipment used in the manufacturing of memory chips and advanced logic chips, specifically those exceeding 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request, mindful of the potential impacts on major domestic firms like Samsung and SK Hynix, which have significant operations in China, their largest trading partner.
Additionally, the Biden administration is contemplating the application of an export control measure known as the foreign direct product rule on allied nations that continue to sell chip manufacturing tools and equipment to China. This rule would prohibit the export of any goods that are produced using a specified percentage of U.S. intellectual property.