Bank of America analysts have indicated that South Korea is one of the few economies globally benefiting from a productivity surge fueled by artificial intelligence (AI). However, rising tensions between the United States and China regarding semiconductor chips could potentially hinder this growth.
The semiconductor sector plays a crucial role in South Korea’s economy, accounting for 17% of its exports. A recent report from Bank of America Global Research notes that the country has emerged as a significant beneficiary of the AI boom, with exports increasing by over 50% year-over-year. Analysts believe that South Korea’s substantial investments in AI research and its increasing number of AI-related patents will likely strengthen its leadership in AI adoption in the long run.
Nevertheless, potential geopolitical tensions may impact the semiconductor supply chain, particularly due to escalating U.S.-China relations. Despite South Korea diversifying its chip exports beyond China, over 30% of its chip exports in 2023 were directed towards China and Hong Kong, with exports to the U.S. being comparable.
Bank of America analysts warned that if U.S.-China tensions worsen and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
In addition, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in this supply chain could complicate the ability of South Korean companies to obtain the required tools for chip manufacturing.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology used in the production of memory chips and advanced logic chips, specifically those that are more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request while acknowledging its potential repercussions on major firms such as Samsung and SK Hynix, both of which have significant operations in China, the country’s largest trading partner.
Meanwhile, the Biden administration is investigating the use of an export control mechanism known as the foreign direct product rule against allies that continue to supply China with chipmaking tools and equipment. This rule prevents the export of any goods to any country if they are produced using a specific threshold of U.S. intellectual property components.