South Korea is among the few economies globally experiencing productivity gains from artificial intelligence, yet analysts from Bank of America caution that escalating U.S.-China tensions regarding semiconductors may pose challenges to its growth.
The semiconductor sector represents 17% of South Korea’s exports, and according to a report from Bank of America Global Research, the nation has emerged as the top benefactor of the AI surge, with exports climbing over 50% year-over-year. Analysts are optimistic that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its position in AI adoption moving forward.
However, they note that “potential geopolitical tensions could weigh on the semiconductor supply chain,” especially given the rising friction between the U.S. and China, which could impede AI growth in South Korea. Although South Korea has begun shifting its chip exports from China to other regions, over 30% of its chip exports in 2023 were still directed towards China and Hong Kong, with similar figures for exports to the U.S.
Bank of America’s analysts warned that if geopolitical strains escalate and the U.S. implements further trade restrictions on exports of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. If tensions disrupt the supply chain, sourcing essential tools for manufacturing could become increasingly difficult for South Korean companies.
The U.S. has reportedly requested that South Korea impose restrictions on exporting to China technologies and equipment integral to the production of memory and advanced logic chips, particularly those exceeding 14-nanometer for logic chips and 18-nanometer for DRAM memory chips. South Korean officials are contemplating this request amid concerns about potential repercussions for major domestic firms like Samsung and SK Hynix, which have substantial operations in China.
In related developments, the Biden administration is reportedly evaluating the implementation of an export control known as the foreign direct product rule, targeting allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods to any nation that are produced using a certain percentage of U.S. intellectual property.