South Korea stands out globally for experiencing a productivity increase attributed to artificial intelligence, yet escalating tensions between the U.S. and China regarding semiconductor technology may hinder its growth, according to analysts from Bank of America.
The semiconductor sector represents 17% of South Korea’s exports, and the nation has emerged as a primary benefactor of the AI revolution, with exports witnessing over 50% growth year-on-year, as reported by Bank of America Global Research. Analysts anticipate that ongoing investments in AI research and development, along with a rise in AI-related patents, will solidify South Korea’s standing in AI adoption over the long term.
Despite this positive outlook, the report warns that geopolitical tensions could adversely impact the semiconductor supply chain, particularly due to the ongoing discord between the U.S. and China. In 2023, China and Hong Kong collectively accounted for more than 30% of South Korea’s chip exports, with the same percentage of exports going to the U.S. As South Korea has diversified some of its chip exports to other regions, this reliance remains a concern.
Bank of America analysts cautioned that if U.S.-China tensions escalate and the U.S. enforces further trade restrictions 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 certain chip-making components and machinery. Disruptions in supply chains due to heightened tensions could complicate South Korean companies’ access to essential tools for chip production.
The U.S. has reportedly urged South Korea to limit exports to China of machinery and technology pertinent to manufacturing advanced memory chips and logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are contemplating the U.S. request, mindful of the potential consequences for major corporations like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
In parallel, the Biden administration is evaluating the implementation of an export control mechanism known as the foreign direct product rule, targeting allies that continue to supply chip-making tools and technology to China. This rule restricts the export of goods to any nation if they incorporate a defined percentage of U.S. intellectual property.