South Korea is one of the few economies globally experiencing a productivity increase due to artificial intelligence, but analysts at Bank of America warn that U.S.-China tensions regarding semiconductor chips may pose a risk to this growth.
According to a Bank of America Global Research report, semiconductors represent 17% of South Korea’s exports, and the nation has emerged as a leading beneficiary of the AI boom, with exports soaring over 50% year-over-year. Analysts anticipate that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will enhance its position in AI adoption in the long run.
However, the report also cautions that potential geopolitical tensions could affect the semiconductor supply chain, particularly due to escalating conflicts between the U.S. and China, which may hinder AI growth in South Korea. While the country 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. being similar.
Should geopolitical tensions escalate, especially if the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could significantly impact South Korea’s memory semiconductor exports, Bank of America analysts warn.
Moreover, South Korean chipmakers rely on China for certain components and equipment required in chip production. Any disruptions in the supply chain caused by rising tensions would make it challenging for these companies to acquire the necessary tools for manufacturing chips.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for manufacturing memory chips and advanced logic chips, particularly those exceeding 14-nanometers and DRAM memory chips above 18-nanometers. South Korean officials are reportedly considering the U.S. request, taking into account potential impacts on major firms like Samsung and SK Hynix, which have significant operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is contemplating implementing an export control known as the foreign direct product rule on allied countries that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of goods that contain a certain percentage of U.S. intellectual property to any country.