South Korea stands out as one of the few economies globally experiencing a productivity increase driven by artificial intelligence. However, analysts from Bank of America warn that escalating U.S.-China tensions regarding semiconductor technology could pose challenges to this growth.
The semiconductor sector represents 17% of South Korea’s total exports, and a recent report from Bank of America Global Research reveals that the country has significantly benefited from the AI boom, with exports rising over 50% year-over-year. The analysts predict that South Korea’s substantial investments in AI research and development, combined with a growing pool of AI-related patents, will enhance its position in the adoption of AI technology.
Despite this positive outlook, the analysts caution that potential geopolitical risks may impact the semiconductor supply chain, particularly due to the increasing friction between the U.S. and China. While South Korea has managed to diversify its chip exports away from China, the report highlights that in 2023, China and Hong Kong accounted for more than 30% of the nation’s chip exports, with exports to the U.S. being approximately the same.
According to Bank of America analysts, if geopolitical tensions escalate and the U.S. enforces further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor export sector.
Additionally, South Korean chip manufacturers rely on China for certain components and equipment crucial for chip production. Any disruptions in the supply chain due to heightened tensions could make it more challenging for South Korean companies to acquire the necessary tools for manufacturing chips.
The U.S. has reportedly requested that South Korea limit exports of equipment and technology used for producing memory chips and advanced logic chips, particularly those with specifications exceeding 14-nanometers for logic chips and 18-nanometers for DRAM memory chips. South Korean officials are contemplating this request due to the potential impacts on major firms such as Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Meanwhile, the Biden administration is reportedly evaluating the use of an export control mechanism known as the foreign direct product rule against allies that continue supplying chipmaking tools and equipment to China. This rule would prohibit the export of any goods to any nation if they include a specified percentage of U.S. intellectual property components.