South Korea is experiencing a productivity increase attributed to artificial intelligence, distinguishing it from many other global economies. However, analysts from Bank of America warn that escalating U.S.-China tensions, particularly concerning semiconductors, could hinder this growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, with the nation being a significant beneficiary of the current AI expansion. Exports have surged over 50% year-over-year, and analysts believe that South Korea’s substantial investments in AI research and development, alongside a rising number of AI-related patents, will enhance its position in the AI field even further.
Despite this positive outlook, the analysts caution that geopolitical tensions could affect the semiconductor supply chain. The ongoing conflict between the U.S. and China remains a potential obstacle to South Korea’s AI-driven growth. Even though South Korea has worked to diversify its chip exports away from China, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar percentage directed towards the U.S.
Bank of America analysts express concern that if U.S.-China tensions escalate, especially if the U.S. imposes further trade restrictions against China’s access to advanced or AI-related semiconductor exports, it might critically impact South Korean memory chip exports.
Additionally, South Korean chip manufacturers rely on China for some of the essential components and equipment needed in chip production. Any disruptions in the supply chain due to rising tensions could hinder their ability to manufacture chips effectively.
Reports indicate that the U.S. has requested South Korea to limit exports to China of tools and technology required for producing memory chips and advanced logic chips, specifically those surpassing 14-nanometer for logic chips and 18-nanometer for DRAM. South Korean officials are reportedly considering this request, mindful of its potential effects on major domestic companies like Samsung and SK Hynix, which have significant operations in China.
In parallel, the Biden administration is contemplating implementing an export control measure known as the foreign direct product rule against allies continuing to provide chipmaking tools and equipment to China. This rule would prevent the export of goods manufactured with a certain percentage of U.S. intellectual property components to any country.