South Korea is among the few economies worldwide experiencing a productivity increase attributed to artificial intelligence (AI), but rising U.S.-China tensions over semiconductor technology could pose a risk to its growth, according to analysts at Bank of America.
The semiconductor sector represents 17% of South Korea’s total exports, and a report from Bank of America Global Research indicates that the nation has emerged as the primary beneficiary of the AI surge, with a year-on-year export growth exceeding 50%. Analysts believe that South Korea’s substantial investment in AI research and development, as well as an increasing number of AI-related patents, will bolster its leadership in AI adoption.
Nonetheless, analysts caution that potential geopolitical conflicts could impact the semiconductor supply chain, especially with the escalating strains between the U.S. and China. While South Korea has taken steps to diversify its chip exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong. Exports to the U.S. were roughly similar.
Bank of America analysts highlighted that if geopolitical tensions worsen and the U.S. enforces more trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Disruptions in the supply chain due to geopolitical tensions could hinder South Korean companies’ ability to procure essential tools for chip production.
The U.S. has reportedly requested South Korea to limit its exports of equipment and technology used for manufacturing memory and advanced logic chips, specifically those more sophisticated than 14-nanometer technology and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating the request due to its potential impact on major firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Concurrently, the Biden administration is reportedly considering applying an export control called the foreign direct product rule to allies that continue to supply chipmaking tools and equipment to China. This rule prevents the export of any goods made with a certain percentage of U.S. intellectual property components to any country.