South Korea stands out as one of the few economies benefiting from a surge in productivity driven by artificial intelligence. However, analysts from Bank of America caution that rising U.S.-China tensions regarding semiconductors could pose challenges to the country’s growth.
The semiconductor sector is crucial for South Korea, comprising 17% of its exports. According to a report from Bank of America Global Research, South Korea has been the largest beneficiary of the AI boom, with a significant year-over-year increase of over 50% in exports. Analysts believe that the nation’s substantial investments in AI research and development, along with a rising number of AI-related patents, will enhance its position in AI adoption in the long run.
Despite these positives, analysts warn that “potential geopolitical tensions could weigh on the semiconductor supply chain,” particularly the escalating discord between the U.S. and China. While South Korea has diversified its chip exports to other regions, more than 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being roughly equivalent.
Bank of America analysts note that if U.S.-China tensions worsen and the U.S. imposes additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korean memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for essential chipmaking components and equipment. Disruption in these supply chains due to geopolitical tensions could hinder the ability of South Korean companies to acquire the necessary tools for chip production.
The U.S. has allegedly requested that South Korea limit exports of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly contemplating this request due to potential repercussions for major firms like Samsung and SK Hynix, both of which have operations in China, the country’s largest trading partner.
In addition, the Biden administration is reportedly mulling the application of an export control called the foreign direct product rule against allies who continue to supply chipmaking tools to China. This rule would prevent the export of any goods to a country if they have been manufactured using a specified proportion of U.S. intellectual property components.