South Korea stands out as one of the few economies worldwide experiencing a productivity increase linked to artificial intelligence, but the escalating tensions between the U.S. and China over semiconductor chips may pose risks to this growth, according to analysts at Bank of America.
The semiconductor sector is crucial for South Korea, representing 17% of its exports. A report from Bank of America Global Research highlights that South Korea has emerged as the leading beneficiary of the AI surge, with exports rising more than 50% year-over-year. Analysts express optimism that the nation’s substantial investments in AI research and development, coupled with an increasing number of AI-related patents, will enhance its capabilities in this field in the long run.
Nevertheless, the report warns that geopolitical tensions could impact the semiconductor supply chain, particularly due to the rising strain between the U.S. and China. Although South Korea has begun to diversify its chip exports beyond China to other regions, over 30% of its semiconductor exports in 2023 were directed to China and Hong Kong, with exports to the U.S. being comparable.
Bank of America analysts caution that if geopolitical tensions escalate further and the U.S. enacts more trade restrictions on advanced or AI-related chip exports to China, it could heavily impact the memory semiconductor export market in Korea.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Supply chain disruptions stemming from heightened tensions would create additional challenges for these firms in sourcing essential production tools.
The U.S. has reportedly urged South Korea to limit its exports to China, particularly of equipment and technologies used for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are contemplating this request, considering the potential implications for major firms like Samsung and SK Hynix, which have significant operations in China.
In addition, the Biden administration is reportedly evaluating the possibility of implementing an export control mechanism known as the foreign direct product rule against allies that continue to supply chipmaking technology to China. This rule would prevent the export of any goods manufactured using a specified percentage of U.S. intellectual property components.