South Korea stands out as one of the few economies globally experiencing a productivity surge thanks to artificial intelligence. However, analysts at Bank of America have warned that rising U.S.-China tensions concerning semiconductor chips may pose a threat to this growth.
According to a report from Bank of America Global Research, the semiconductor industry constitutes 17% of South Korea’s exports. The country has significantly benefited from the AI boom, with exports increasing by over 50% year-over-year. Analysts believe that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will continue to bolster its position in AI adoption.
Nevertheless, the analysts cautioned that potential geopolitical conflicts could impact the semiconductor supply chain. The escalating tensions between the U.S. and China are seen as a possible challenge for AI growth in South Korea. Although South Korea has diversified its chip exports beyond China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar share exported to the U.S.
Bank of America analysts noted that if geopolitical tensions escalate and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could severely affect memory semiconductor exports from South Korea.
Additionally, South Korean chip manufacturers rely on China for several components and equipment essential for chip production. A disruption in the supply chain due to heightened tensions would hinder South Korean companies’ access to necessary tools for manufacturing chips.
The U.S. has reportedly requested that South Korea limit exports to China of equipment and technology utilized in the production of memory chips and advanced logic chips, particularly those more sophisticated than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are evaluating this request amid concerns regarding potential repercussions for major firms like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In a related development, the Biden administration is contemplating implementing an export control known as the foreign direct product rule. This regulation would prevent the export of any products to any nation if they incorporate a specific percentage of U.S. intellectual property components.