Bank of America analysts report that South Korea is experiencing one of the few productivity boosts from artificial intelligence in the global market. However, growing tensions between the U.S. and China over semiconductor technology could pose challenges to this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a significant beneficiary of the AI surge, with exports increasing over 50% year-over-year, as highlighted in a recent Bank of America Global Research report. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will enhance its role in AI adoption in the future.
Despite this optimistic outlook, analysts caution that escalating geopolitical tensions may impact the semiconductor supply chain, particularly due to the ongoing U.S.-China rivalry. Although South Korea has made efforts to diversify its chip exports away from China, over 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. at around the same proportion.
Bank of America analysts noted that if U.S.-China tensions worsen and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could significantly harm South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for certain essential components and equipment for chip production. This reliance means that any disruptions in the supply chain caused by escalating tensions would hinder South Korean companies from obtaining the necessary tools for chip manufacturing.
The U.S. has reportedly asked South Korea to limit exports of equipment and technology to China for producing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are contemplating this request due to potential impacts on leading firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.
In parallel, the Biden administration is considering implementing export controls using the foreign direct product rule, targeting allies that continue to sell chipmaking tools and equipment to China. This rule would prevent the export of any goods to any country if they are produced with a certain percentage of U.S. intellectual property components.