South Korea stands out as one of the few economies currently experiencing productivity gains from artificial intelligence (AI). However, analysts from Bank of America warn that rising tensions between the U.S. and China over semiconductor technology could pose risks to this progress.
According to a Global Research report from Bank of America, the semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI wave, with chip exports increasing by more than 50% year-over-year. The long-term outlook suggests 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.
Nevertheless, analysts caution that “potential geopolitical tensions could strain the semiconductor supply chain,” particularly in light of escalating U.S.-China hostilities. While South Korea has made strides in diversifying chip exports beyond China, over 30% of its chip exports in 2023 were still directed towards China and Hong Kong, with exports to the U.S. being similar.
Bank of America analysts noted that if U.S.-China tensions deepen and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could seriously impact South Korean memory semiconductor exports.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in the supply chain could hinder South Korean companies’ ability to obtain vital tools for manufacturing chips.
The U.S. has reportedly requested that South Korea limit exports to China of technology and equipment utilized in the production of advanced memory chips and logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are assessing this request in light of the potential consequences for major companies, such as Samsung and SK Hynix, that operate within China, its largest trading partner.
In a related development, the Biden administration is contemplating the application of an export control mechanism known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any product that incorporates a specific percentage of U.S. intellectual property to any nation.