South Korea is one of the few economies globally experiencing a productivity increase due to artificial intelligence, but analysts from Bank of America warn that escalating U.S.-China tensions over semiconductor chips could hinder its economic growth.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as the major beneficiary of the AI surge, boasting over a 50% rise in exports year-over-year, as indicated in a recent Bank of America Global Research report. Analysts predict that South Korea’s significant investments in AI research and development, along with an increasing number of AI-related patents, will enhance its standing in AI adoption in the long run.
Despite this optimistic outlook, analysts caution that geopolitical stresses may impact the semiconductor supply chain, particularly due to rising tensions between the U.S. and China, which could pose a threat to AI growth in South Korea. Although South Korea has been diversifying its semiconductor exports away from China to other regions, China and Hong Kong accounted for over 30% of its chip exports in 2023, a figure comparable to its exports to the U.S.
Should geopolitical strains escalate and the U.S. implement further trade restrictions on advanced or AI-related chip exports to China, it could severely disrupt memory semiconductor exports from Korea, according to Bank of America analysts.
Moreover, South Korean chip manufacturers rely on China for certain components and equipment used in chip production. Consequently, if tensions disrupt these supply chains, it could complicate the ability of South Korean companies to obtain the necessary tools for chip manufacturing.
The United States has reportedly urged South Korea to limit exports of chipmaking technology and equipment to China, targeting specifically advanced logic chips above the 14-nanometer threshold and DRAM memory chips over 18-nanometer. South Korean officials are contemplating this request due to potential impacts on major South Korean firms like Samsung and SK Hynix, which operate in China, its largest trading partner.
Additionally, the Biden administration is considering invoking an export control known as the foreign direct product rule against allies that maintain sales of chipmaking tools and equipment to China. This regulation would prevent the export of any product manufactured with a significant portion of U.S. intellectual property components to any country.