South Korea stands out as one of the few economies globally experiencing a productivity uptick attributed to artificial intelligence (AI); however, tensions between the U.S. and China regarding semiconductor chips could pose risks to its growth, according to analysts from Bank of America.
The semiconductor sector constitutes 17% of South Korea’s exports, and the nation is described as a major beneficiary of the AI surge, with exports having increased over 50% year-over-year. Analysts from Bank of America Global Research project that South Korea’s significant investments in AI research and development, coupled with an increasing volume of AI-related patents, will enhance its standing in AI implementation.
Nonetheless, analysts caution that potential geopolitical tensions may impact the semiconductor supply chain, particularly the escalating conflict between the U.S. and China, which could hinder AI advancement in South Korea. Although South Korea has diversified its chip exports beyond China to other regions, over 30% of its chip exports in 2023 were directed towards China and Hong Kong, with U.S. exports being approximately equal.
Bank of America analysts indicated that if U.S.-China tensions escalate and the U.S. enforces stricter trade limits on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean semiconductor manufacturers rely on China for various chipmaking components and equipment. Any disruption in these supply chains due to geopolitical issues could complicate the ability of South Korean companies to obtain necessary production tools.
Reports suggest that the U.S. has requested South Korea to limit exports of equipment and technology essential for manufacturing memory chips and advanced logic chips, specifically those surpassing 14-nanometers and 18-nanometers for DRAM memory chips. South Korean officials are reportedly deliberating this request, considering the potential impact on major South Korean companies like Samsung and SK Hynix, both of which have operations in China, that remains their largest trading partner.
In related developments, the Biden administration is contemplating the implementation of export controls under the foreign direct product rule against allies that persist in supplying chipmaking tools and equipment to China. This regulation would prohibit the export of any goods to nations if they contain a specified proportion of U.S. intellectual property.