South Korea is experiencing a unique productivity boost attributed to artificial intelligence, but analysts from Bank of America caution that U.S.-China semiconductor tensions may pose risks to its growth trajectory.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI surge, with exports increasing by over 50% year-on-year. Analysts project that South Korea’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its position in AI adoption over the long term.
However, the report highlights that “potential geopolitical tensions could weigh on the semis supply chain,” particularly due to escalating conflicts between the U.S. and China, which may challenge South Korea’s AI growth. Despite diversifying chip exports to other regions, over 30% of South Korea’s chip exports in 2023 still went to China and Hong Kong, while exports to the U.S. were approximately equal.
Bank of America analysts warn that if geopolitical tensions intensify and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could seriously jeopardize South Korea’s memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Should tensions disrupt the supply chain, it might become increasingly challenging for South Korean companies to obtain the required tools for semiconductor manufacturing.
Reports suggest that the U.S. has requested South Korea to limit exports of equipment and technology essential for producing memory chips and advanced logic chips, particularly those advancements exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean officials are contemplating this U.S. request, considering the potential impacts on major domestic companies like Samsung and SK Hynix, both of which have operations in China, their biggest trading partner.
In parallel, the Biden administration is reportedly mulling over employing an export control mechanism known as the foreign direct product rule against allies that maintain sales of chipmaking tools and equipment to China. This rule prohibits the export of goods to any country if they are produced with a specific percentage of U.S. intellectual property components.