South Korea is notably one of the few economies worldwide experiencing a productivity increase due to artificial intelligence. However, analysts from Bank of America warn that escalating U.S.-China tensions over semiconductor technology may pose risks to this growth trajectory.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, and the country has emerged as a leading beneficiary of the AI boom, seeing over a 50% year-on-year increase in exports. Analysts believe that South Korea’s significant investment in AI research and development, along with a rise in AI-related patents, will enhance its position in AI utilization in the future.
Despite these positive indicators, analysts caution that geopolitical tensions could affect the supply chain of semiconductors, particularly due to increasing hostilities between the U.S. and China. The report highlights that while South Korea has made efforts to diversify its chip exports away from China, over 30% of its semiconductor exports in 2023 still went to China and Hong Kong, with a similar amount headed to the U.S.
Bank of America analysts noted, “If geopolitical tensions worsen and the U.S. imposes stricter trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.”
Furthermore, South Korean semiconductor manufacturers rely on China for several components and equipment necessary for chip production. Any disruption in the supply chain due to rising tensions could hinder their ability to source essential manufacturing tools.
The U.S. has reportedly sought to limit South Korea’s exports of equipment and technology for producing memory chips and advanced logic chips to China. This includes chips more advanced than 14-nanometer logic chips and DRAM memory chips exceeding 18-nanometer technology. South Korean officials are considering the U.S. request, given the potential impact on major firms like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
In parallel, the Biden administration is looking into employing an export control mechanism known as the foreign direct product rule against allied nations that continue to sell chipmaking tools and equipment to China. This rule would prohibit exports of any goods made with a certain percentage of U.S. intellectual property to any country.